Union of India & Ors Vs.
Coromandel Fertilizers Limited & ANR [1975] INSC 310 (9 December 1975)
GOSWAMI, P.K.
GOSWAMI, P.K.
UNTWALIA, N.L.
CITATION: 1976 AIR 606 1976 SCR (2) 894 1976
SCC (1) 536
ACT:
Income tax Act (43 of 1961), ss. 80J and 80K
Scope of- No deduction from Company's income under s. 80J because Company had
no taxable Income -If Company entitled not to deduct tax at source from the
dividend income of share- holder.
HEADNOTE:
Section 80A(2), Income Tax Act, 1961,
provides that the aggregate amount of deductions under Chapter VIA shall not
exceed the gross total income of the assessee. Under s. 80J(1), which is in
Chapter VIA, where the gross total income of an assessee includes any profits
and gains derived from an industrial undertaking, there shall be allowed, in
computing the total income of the assessee, a deduction of so much of the
profits and gains as does not exceed the amount calculated at 6 per cent per
annum of the capital employed in the industrial undertaking, calculated in the
prescribed manner, and referred to as the relevant amount, and, under s.
80J(3), where the amount of profits and gains derived from the industrial
undertaking falls short of the relevant amount the amount of shortfall, or,
where there are no profits and gains, the whole of the relevant amount shall be
carried forward and set off against the profits and gains of the next
assessment year and so on up to the 7th assessment year from the end of the
initial assessment year.
Section 80K provides that in computing the
total income of an assessee, whose gross total income includes any income by
way of dividends, there shall be allowed, a deduction from the dividend-income
an amount equal to such part thereof as is attributable to profits and gains
derived by the company from an industrial undertaking on which no tax is
payable by the company or in respect of which a company is entitled to a
deduction under s. 80J. Under s. 197(3) if by reason of s. 80K, the whole or
any portion of dividend payable to a share-holder will be deductible in
computing the assessee s total income, application may be made to the Income
Tax Officer to determine the amount to be deducted, and, on such determination,
no tax shall be deducted at source on such amount.
The 2nd respondent is a share-holder of the
1st respondent-company, which is an industrial undertaking. The Company
commenced production in 1967 and was assessed to income tax for the first time
for the assessment years 1969
70. The assessment order disclosed unabsorbed
losses and depreciation. The Income Tax officer determined also the amount
under s. 80J for the assessment years 1969-70 and 1970-71, but as there were no
profits in those assessment years, the amounts were directed to be carried
forward to be set off against pro fits and gains in the succeeding years under
s. 80J(3). For the assessment year 1973-74, the Company made a profit, but as
the total of the unabsorbed loss and depreciation exceeded the Companies
income, the total income for that year of the Company was nil with some
unabsorbed loss and depreciation to be carried forward to the next assessment
year 1974-75, that is, the Company did not have any income assessable to income
tax in the assessment years 1973-74 and hence, there was no deduction under s. 80J(1)
for that year also Out of the profits for that year, the Company declared a
dividend. The Company thereafter sought permission of the Income Tax officer
not to deduct tax at source out of the dividend payable to shareholders, and
also sought a certificate under s. 197(3) pointing out that the dividend
payable by it would qualify for deduction in the hands of the shareholders
under s. 80K. The Income Tax officer rejected the request of the Company, and
the writ petition of the Company was allowed by the High Court.
In appeal to this Court, it was contended by
the Revenue, relying upon Commissioner of Income Tax, Madras v. S. S. Pillay
(1970) 77 I.T.R. 354, 895 that unless there is an actual deduction under s.
80J, the shareholder was not entitled to claim the benefit under s. 80K.
Dismissing the appeal.
HELD: As against actual deduction the
Company's entitlement to deduction under s. 80J in the relevant year is enough
to give a right to the shareholder to invoke s.
80K and obtain, passu, the benefit of the
section. The Company is, therefore, not required to deduct at source the tax
from the dividends which they were declaring to the shareholders and the
Company was entitled to the appropriate certificate under s. 197(3). [901-D-E]
The case relied upon by the Revenue dealt with s. 15C of the 1922 Act and does
not assist the Revenue, because there are the following differences between s
15C of the 1922 Act and ss. 80J and 80K of the 1961 Act: [900B] (a) Under s.
15C, there was no question of carrying forward from one accounting year to the
succeeding year or years sums allowable under this section. That feature of
carrying forward is now prominent in s. 80J(3). [900CD] (b) If an industrial
undertaking has no taxable profits, it cannot claim exemption from tax under s.
15C(1);
and if the undertaking cannot claim the
benefit, a shareholder will not get the benefit under s. 15C(4). that is, under
s, 15C the shareholder was entitled to relief only when the company was able to
get an actual deduction. The company and the shareholder were at par Section
80K, however, shows that there is no legal requirement of a de facto deduction
in the particular assessment year. It is suffcient if the company is entitled
to a deduction. [900G- H, 901B] (c) If actual deduction is required under s.
80K also, an anomally would arise, namely,-the company, when it becomes
entitled to a deduction under s. 80J(1) gets it either in that year or by set
off in subsequent years under s. 80J(3); but the shareholder will be barred from
getting any relief when the dividend is declared in a year in which the
company, because of s. 80A(2), is not able to get an actual deduction. The
Legislature has avoided this anomaly by using the expression the company is
entitled to a deduction in s. 80K and maintained parity between the company and
the shareholder. [901 B-C]
CIVIL APPELLATE JURISDICTION : Civil Appeals
Nos. 969- 972 of 1975.
Appeals by special leave from the judgment
and order dated the 18th September 1974 of the Andhra Pradesh High Court in
writ petition Nos. 2279-80 of 1973 and 4305 of 1974.
B. Sen, M/s. B. B. Ahuja and S. P. Nayar for
the appellants.
M/s. F. N. Kaka, S. N. Talwar, J. B. Ahuja
and Shri Narain for the respondents.
The Judgment of the Court was delivered by
GWSWAMI, J. An important question of law as to the interpretation of section
80K of the Income-tax Act, 1961 (briefly the Act) is raised in these four
appeals by special leave.
M/s Coromandel Fertilesers Limited (First
Respondent) is a registered company incorporated on October 16, 1961, under the
Companies Act and the 2nd Respondent is one of its shareholders holding two
hundred equity shares in the paidup capital of the company out of a total
number of 95,82,010 equity shares issued by it. The company was engaged in
manufacture of fertilisers at its factory at Vishakhapatnam and it commenced
production in December 1967.
896 There is no dispute that the company as
such fulfilled the appropriate conditions laid down under sub-section 4 of
section 80J of the Act to qualify for deduction in respect of profits upto an
extent of six per cent per annum on the capital employed in respect of profit
for the purpose of computation of tax.
The company was assessed to income-tax as an
industrial undertaking for the first time for the assessment year 1969-
70. The orders of assessment were passed on
23-11-1972 and 4-1-1973. The said orders disclosed a sum of Rs. 11,10,176/-
being carried forward as unabsorbed losses to the succeeding year and a sum of
Rs. 9,73,93,861/- being carried forward as unabsorbed depreciation to the
subsequent year.
The capital employed by the company in its
new industrial undertaking was Rs. 48,87,38,018/- and 6% thereof under section
80J(1) amounted to Rs. 2,93,24,281/-. Out of this amount, the amount relating
to the ten months of the year confined to the period during which the
industrial undertaking was in operation was determined by the Income- tax
Officer at Rs. 2,44,36,901/-. As no profit was made in the assessment year
1969-70 the aforesaid "deficiency" within the meaning of section
80J(3) was carried forward to the succeeding year 1970-71. Similarly for the
next assessment year 1971-72 it was recorded in the assessment order that the
company was entitled to deduction of Rs.
2,58,31,806/- under section 80J. As there
were no profits to be absorbed, the said amount has been carried forward under
section 80J(3) to the succeeding assessment year 1971-72.
The returns filed for the assessment year
1971-72 by the company have not been finalised. But all the same the company,
as per its books, had made a profit of Rs. 4.55 crores approximately in the
accounting year 1972 corresponding to the assessment year 1973-74. It does not
appear to be disputed that for the assessment year 1973-74, the company's income
after deducting depreciation for that year would come to Rs. 6.16 crores. This
amount would be subject to set off against unabsorbed depreciation and business
losses which would exceed the said Rs. 6.16 crores resulting in nil total
income with some unabsorbed depreciation and business loss to be carried
forward to the next assessment year 1974-75. It is not disputed that after
setting off the brought-forward allowances the company will not be assessable
to any income-tax upto the assessment year 1973-74.
The company made business profit of Rs. 4.55
crores in the year 1972. The Board of Directors at their meeting held on March
14, 1973, recommended declaration of a maiden dividend of Rs. 76,65,608/- out
of the profits of that year.
The company represented to the Income-tax
Officer on March 3, 1973, seeking a certificate under section 197(3) of the Act
pointing out that the dividend payable by it would qualify for deduction in the
hands of the shareholders under section 80K of the Act., The company sought
permission of the Income-tax Officer not to deduct tax at source out of the
dividend payable to the shareholders. The request of the company was rejected
by the Income-tax Officer holding that the shareholders were not entitled to
the benefit of section 80K of the Act. On coming to know 897 about the
declaration of the dividend by the company, even the Respondent-shareholders
had also requested the company to obtain the necessary certificate. The refusal
of their request led to the institution of writ applications by the respondents
before the High Court of Andhra Pradesh.
According to the High Court the shareholders
are entitled to claim deduction under section 80K of the Act and the company
was entitled to an order of the Income-tax officer under section 197(3) for
issuing a certificate enabling it not to deduct tax out of the dividend payable
to the shareholders.
It is submitted on behalf of the appellants
that question raised is governed by a decision of this Court in Commissioner of
Income-tax. Madras vs. G. S. Sivan Pillai and others. In that case this Court
was required to consider the, provisions of section 15C of the Income-tax Act,
1922 (briefly the old Act) which was largely different from the present
sections with which we are concerned in these appeals. The assessment years
that came up for consideration in that decision were 1954-55 and 1955-56.
It may be appropriate to set out section 15C:
"15C. Exemption from tax of newly
established Industrial Undertakings:
(1) Save as otherwise herein provided, the
tax shall not be payable by an assessee on so much of the profits or gains
derived from any industrial undertaking (or hotel) to which this section
applies as do not exceed six percent, per anum on the capital employed in the
undertaking (or hotel), computed in accordance with such rules as may be made
in this behalf by the Central Board of Revenue.
x x x x (4) The tax shall not be payable by a
shareholder in respect of so such of any dividend paid or deemed to be paid to
him by an industrial undertaking (or a hotel), as is attributable to that part
of the profits or gains on which the tax is not payable under the section.
Explanation:-The amount of dividend in
respect of which the tax is not payable under this sub-section shall be
computed in accordance with such ruleless as may be made in this behalf by the
Central Board of Revenue".
While dealing with the above section this
Court observed in the Commissioner of Income-tax vs. S. S. Siven Pillai (supra)
as under:- "Exemption under section 15C(1) from payment of income-tax is
not related to the business profits; it is related 898 to the taxable profits.
The language of sub-section (3) is clear; the profits or gains of an industrial
undertaking have to be determined under section 10 of the Act. Even if the
undertaking has earned profits out of its commercial activity, if it has no
taxable profits it cannot claim exemption from payment of tax under sub-section
(1) of section 15C; and if the undertaking cannot claim the benefit under
sub-section (1) the shareholders will not get the benefit of sub- section (4),
for there is no dividend paid which is attributable to that part of the profits
or gains on which the tax was not payable by the undertaking.
The company had no taxable profit in the year
of account; it did not accordingly qualify for exemption from payment of tax
under sub-section (1), and since there was no such taxable profit, the dividend
received by the shareholders could not be said to be attributable to that part
of the pro fits or gains on which the tax was not payable under subsection (1).
On the plain terms of section 15C the shareholders cannot obtain the benefit of
exemption from payment of tax".
"The right of the shareholders to obtain
the benefit of exemption under section 15C(4) depends upon the company
obtaining the benefit of exemption under sub-section (1) of section 15C, for
the exemption from payment of tax on the dividend received by the shareholders
is admissible only on that part of the profits or gains on which the tax is not
payable by the company under sub-section (1)".
As will be shown later this decision will not
be of aid to the appellants in view of the changes in the law.
With a view to offer incentive to investment,
section 15C of the Old Act was dealing with the principle of truce with tax for
a limited period of what is described as tax holiday benefit with which we are
concerned. The Finance (No. 2) Act of 1967 substituted the earlier provisions
in that behalf in Chapter VI-A in the Income-tax Act 1961 with effect from
April 1, 1968. We will, therefore, read the provisions of the material sections
in this Chapter, namely, sub-sections (1) and (3) of section 80J and section
80K:
"80J(1). Where the gross total income of
an assessee includes any profits and gains derived from an industrial
undertaking or a ship or the business of a hotel, to which this section
applies, there shall, in accordance with and subject to the provisions of this
section, be allowed in computing the total income of the assessee, a deduction
from such profits and gains (reduced by the aggregate of the deductions, if
any, admissible to the assessee under section 80H and section 80-(I) of so much
of the amount thereof as does not exceed the amount calculated at the rate of
six per cent, per annum on the capital employed in the industrial undertaking
899 or ship or business of the hotel, as the case may be, computed in the
prescribed manner in respect of the previous year relevant to the assessment
year (the amount calculated as aforesaid being hereafter, in this section,
referred to as the relevant amount of capital employed during the previous
year).
(3) where the amount of the profits and gains
derived from the industrial undertakings or ship or business of the hotel, as
the case may be, included in the total income as computed without applying the
provisions of section 64 and before making any deduction under Chapter VI-A or
section 280(O) in respect of the previous year relevant to an assessment year
commencing on or after the 1st day of April, 1967 (not being an assessment year
prior to the initial assessment year or subsequent to the fourth assessment
year as reckoned from the end of the initial assessment year) fails short of
the relevant amount of capital employed during the previous year, the amount of
such shortfall, or, where there are no such profits and gains, an amount equal
to the relevant amount of capital employed during the previous year (such
amount, in either case, being hereafter, in this section, referred to as
definition) shall be carried forward and set off against the profits and gains
referred to in sub-section (1) (as computed after allowing the deductions, if
any, admissible under section 80H, section 80-I and the said sub-section (1) in
respect of the previous year relevant to the next following assessment year
and, if there are no such profits and gains for that assessment year, or where
the deficiency exceeds such profits and gains, the whole or balance of the
deficiency as the case may be, shall be set off against such profits and gains
for the next following assessment year and if and so far as such deficiency
cannot be wholly so set off, it shall be set off against such profits and gains
assessable for the next following assessment year and so on:
Provided that- (i) in no case shall the
deficiency or any part thereof be carried forward beyond the seventh assessment
year as reckoned from the end of the initial assessment year;
(ii) where there is more than one deficiency
and each such deficiency relates to a different assessment year, the deficiency
which relates to an earlier assessment year shall be set off under this
sub-section before setting off the deficiency in relation to a later assessment
year:
Provided further that in the case of an
assessee being a co-operative society, the provisions of this sub-section shall
900 have effect as if for the words "fourth assessment year", the
words 'sixth assessment year' had been substituted".
"80K. Where the gross total income of an
assessee, being the owner of any share or shares in a company, includes any
income by way of dividends paid or deemed to have been paid by the company in
respect of such share or shares, there shall subject to any rules that may be
made by the Board in this behalf. be allowed, in computing his total income, a
deduction from such income by way of dividends of an amount equal to such part
thereof as is attributable to the profits and gains derived by the company from
an industrial undertaking or ship or the business of a hotel on which no tax is
payable by the company under this Act for any assessment year commencing prior
to the 1st day of April, 1968, or in respect of which the company is entitled
to a deduction under section 80J".
A perusal of sections 80J (3) and 15C would
clearly show the difference in the scheme of the two provisions. Broadly
speaking, there was no question of "carry forward" from one
accounting year to the succeeding year or years the sums allowable under
section 15C. That feature is now prominent in section 80J in clearly providing
that "where there are no such profits and gains, an amount equal to the
relevant amount or capital employed during the previous year (viz., the six per
cent of the capital employed).. shall be carried for ward and set off against
profits and gains referred to in sub-section, (1) ........".
There is another vital distinction. While
section 15C(4) refers to relief in case of only taxable profits, section 80K
provides that in computing the total income of an assessee whose gross total
income includes any income by way of dividends, there shall be allowed in
computing his total income a deduction from such income by way of dividends an
amount equal to such part thereof as is attributable to profits and gains
derived by the company from an industrial under taking on which no tax is
payable by the company under the Act or in respect of which the company is
entitled to deduction under section 80J (emphasis supplied). The expression
"or in respect of which the company is entitled to a deduction under section
80J" introduces a new concept. There is no legal requirement of a de facto
deduction of the amount in question in the particular assessment year. As
against actual deduction the company's entitlement to deduction in the relevant
year is enough to answer the requirement of section 80J.
Necessarily, therefore, the dividend-earner
will also be entitled to invoke section 80K and obtain pari passu the benefit
of the provision.
It is submitted on behalf of the appellants
that unless there is actual deduction under section 80J, the shareholder is not
entitled to claim benefit under section 80K. The appellants further contend
that section 80A(2) of the Act is a complete answer to the claim of the
respondents. By sub- section (2) of section 80A the entire amount of deduction
under Chapter VI-A shall not in any case exceed the gross 901 total income of
the assessee. It was, therefore, submitted that as there were not assessable
incomes of the company in the particular years, the question of deduction of
the monetary benefit by the shareholder would not arise. We are unable to
accept this submission. Under old section 15C, the shareholder was entitled to
relief only when the company was able to get actual deduction. Both were at
par. The parity has been sought to be maintained under the amended provisions
of sections 80J and 80K between the company and the shareholder. The company,
when becomes entitled to deductions under section 80J(1), gets it either in
that year or by a set off in subsequent years. If the interpretations which we
have put to the new sections were not to hold good, the result will be that the
shareholder will be debarred from getting any relief when dividend is declared
in a year in which the company, because of section 80A(2), is not able to get actual
deduction. The company will reap the advantage of set off under section 80J(3)
in subsequent years, while the shareholder for the dividend declared in the
past, will get no relief, under section 80K. This anomaly is avoided, and the
legislature intended to avoid it, by use of the expression "the company is
entitled to a deduction" in section 80K and on the interpretation we have
put above.
We are, therefore, clearly of opinion that
the company was not required under the law to deduct at source tax from the
dividends which they were declaring to the shareholder.
The company was entitled to an appropriate
certificate from the Income-tax Officer under section 197(3). The appeals are,
therefore, dismissed and the impugned orders are set aside. The company will be
entitled to approach the Income- tax Officers for such appropriate certificates
under section 197(3), as may be admissible on proper computation under the
relevant rules. There will be no order as to costs.
V.P.S. Appeals dismissed.
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