Commissioner of Income Tax, Madras Vs.
M/S. P.S.S. Investments (P) Ltd. [1976] INSC 284 (9 November 1976)
KHANNA, HANS RAJ KHANNA, HANS RAJ
KRISHNAIYER, V.R.
CITATION: 1977 AIR 424 1977 SCR (2) 78 1976
SCC (4) 712
ACT:
Finance Act, 1958, First Schedule Part II,
Explanation (iii) to paragraph D--Calculation of rebate in computation of
super-tax, whether profits earned during previous year to be taken into
account.
HEADNOTE:
The Income-tax officer took into account the
respondent's entire dividend income of the year ending December 30, 1957, while
calculating the super-tax payable by it for the assessment year 1958-59. In
appeal against the computation the respondent contended before the Appellate
Assistant Commissioner that the dividend-income included profits earned during
the previous years, and that rebate should be reduced only with reference to
the proportionate part of the dividend declared during 1957 which had come out
of the other income assessed to income-tax. and super-tax in the assessment
year 1957-58. The respondent's contention was accepted in principle. The
Department's appeal was dismissed by the Appellate Tribunal. The matter was
then referred to the High Court under section 66(1) of the Indian Income Tax
Act, 1922, and decided in favour of the assessee.
Allowing the appeals the Court,
HELD: For computing the reduction in rebate
under paragraph D of Part II of the First Schedule to the Finance Act, 1958,
the position of profits and gains as it existed in the previous year should be
taken into account and not in the years prior to that Clause (iii) introduces a
fiction with regard to the amount of dividends which shall be deemed to have
been distributed. The taxing authorities have to take into account the
company's total income and the profits and gains other than capital receipts
reduced by certain allowances only in the previous year, i.e., the year in
which the dividend was distributed. The fact that those profits and gains
accrued in years prior to the previous year and included' portions which were
exempt from tax under the provisions of the Income-tax Act would not be of much
relevance.
[85 A-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 1853(A) and 1854 of 1971.
Appeal from the Judgment and Order dated the
18th April, 1969 of the Madras High Court Madras in Tax Cases Nos. 18 and 19 of
1966.
V.S. Desai, J. Ratnamurthi and M.N. Shroff,
for the Appellant.
T.A. Ramachandran, for Respondent.
The Judgment of the Court was delivered by
KHANNA, J. This judgment would dispose of two civil appeals Nos. 1853(A) and
1854 of 1971 which have been filed on certificate by the Commissioner of
Income-tax against the judgment of Madras High Court (reported in 79 ITR 456)
answering the following two questions referred to it in two references under
section 66(1) of 79 the Indian Income-tax Act, 1922 in the affirmative in
favour of the assessee and against the revenue:
"1. Whether on the facts and in the
circumstances of the case, the Appellate Tribunal was right in holding that for
computing the reduction in rebate under Para D of Part II to the First schedule
to the Finance Act, 1959 (in R. A. No. 169 of 196566) and of Finance Act,
1958,(in R.A. No. 168 of 1965-66) in the composition of profits of the year
from which the dividend had been declared should be looked into, and
2. Whether the Appellate Tribunal was right
in law in holding that the paid up capital of the assessee company should be
proportionately reduced for the purpose of reducing the rebate in Corporation
Tax in the manner directed." The matter relates to the assessment of the
respondent company for the assessment years 1958-59 and 1959-60. For sake of
convenience we may set out the facts relating to the assessment year 1958-59.
It is the common case of the parties that the decision about that year would
also govern the point of controversy relating to the other year.-The assessee
is a private limited company. In the previous year ending on December 31, 1957
relevant for the assessment year 1958-.59, it declared a dividend of Rs. 99.000.
Its paid up capital was Rs. 1,65,000. The total income of the assessee company
was determined at Rs. 73,255 made up as under:
Rs.
Business Nil Other sources 26,554 Capital
gains 46,701 Total income 73,255 As the dividend of Rs. 99,000 declared by the
assessee company was in excess of 6 per cent of the paid up capital of the
company, the Income-tax Officer worked up the super-tax payable by the.
assessee as under:
RS.
Corporation tax @ 50 % on Rs. 26,554 13,277
less rebate @ 30 % on Rs. 26,554 7,966.20 Reduction in rebate Up to 6%0 of the
paid-up capital 9900 . Nil 6% to 10% of the paid up capital in 6600 @ 10%
660.00 Balance at 20% 82500 @ 20% 1,65,00.00 17,160.00 Balance carried forward
to next year 9,193.80 The assessee company objected to the above computation of
the super-tax and took the matter in appeal to the Appellate Assistant
Commissioner. It w.as urged on behalf of the assessee that the dividend of Rs.
99,000 declared during the year ending 1957 was 80 out of the profits of the
previous year which ended on December 31, 1956. According to the assessee, the
dividend income determined for the assessment year 1957-58 was Rs.
1,74,196 which included capital gains to the
extent of Rs. 1,10,105. The dividend of Rs. 99,000, it was urged, should be
apportioned between the capital gain of Rs. 1,10,105 and the other income of
Rs. 64,091 after taking into account the tax payable thereon. The assessee
computed the figures as under:
Capital receipts not assessable 44,279 Capital
gains is assessed less tax 75,423 Other income less tax 22,492 1,42,194 The
assessee claimed that rebate should be reduced only with reference to the sum
of Rs. 15,659 being proportionate part of the dividend declared during the
previous year ending on December 31, 1957 which had come out of the other
income assessed to income-tax and super-tax in the assessment year 1957-58. The
figure of Rs. 15,659 was arrived at by the assessee as under:
99,000 x 22,492 ---------------1,42, 194 The
Appellate Assistant Commissioner accepted in principle the assessee's
contention that the components of the dividend should be considered with
reference to the profits of the previous year. He, however, computed
proportionate dividend at a higher figure by including the capital gains of Rs.
75,423 with the sum of Rs. 22,492 as shown below:
Net available profits attributable to
assessed income (22,492-75,423) 97,915 Net available profits 1,42,194 Dividends
declared 99,000 97,915 99,000 Proportionate dividend: --------------=68,171
1,42,194 The Appellate Assistant Commissioner retained the paid up capital at
Rs. 1,65,000 as per balance sheet without apportionment on the basis of taxed
and non-taxed income.
The department took the matter in appeal to
the Appellate Tribunal. The Tribunal dismissed the appeal holding that the
"previous year" under Explanation (iii) to Paragraph D of Part II to
the First Schedule to the Finance Act, 1958, refers only to the previous year
out of the profits of which the dividends were declared and therefore the
composition of the profits and gains of the company out of which dividends were
declared had to be looked into for working out the proportion under Explanation
(iii) to Paragraph D of Part II to the First Schedule to the Finance Act of
1958.
At the instance of the Commissioner, the
questions reproduced above were thereafter referred to the High Court.
81 In appeal before the High Court, it was
argued on behalf of the revenue that dividends having been distributed during
the accounting year relevant to the assessment year in question, it is that
year alone which has to be taken into consideration for calculating the super
tax under the appropriate Finance Act. The fact that such profits were traceable
to the profits earned during the year prior to the accounting year, according
to the submission, was not of significance and had to be ignored for the
purpose of working out the quantum of rebate in such super-tax made available
in the Finance Act. It was accordingly urged that the year of distribution,
namely, the accounting year, is the only basis for the calculation of the
rebate. As against that, it was submitted on behalf of the assessee that it
would be unreal if the years in which the profits had been admittedly earned
was to be ignored and reliance was placed for calculation of rebate on the
ministerial act of distribution. The High Court, while answering the questions
referred to it in favour of the assessee and against the revenue, observed us
under:
"If, therefore, 'distribution' is thus
to be understood as a ministerial act resulting from the indoor management of
the company, can that be the sine qua non to decide the question of quantum of
rebate to which the company would be entitled under a particular Finance Act?
If the year in which distribution is to be effected is considered for purposes
of the Finance Act and for the determination of the quantum of rebate, then it
would result in a notional implementation of the benefit contemplated by the
legislature to a company in the nature of a rebate and would not amount to a
realistic approach of such a vital problem connected with the finances of the
company. It may be that in any particular year when distribution of dividends
have been made, the paid-up capital might have been reduced or increased, as
the case may be. Is that paid-up capital going to be taken as the basis for
working out the relative benefits or disadvantages to be enjoyed or suffered by
a company? We are of the view that it is neither the intention of the
legislature, nor could it be said to be a reasonable inference of the
provisions thereto. In fact, the Explanation to the Finance Act, 1958, which
elucidates the term 'paid-up capital', gives the key to the interpretation of
the word 'distribution'.
'Paid-up capital' means the paid-up capital
of the company on the first day of the previous year relevant for the
assessment year ending on 31st March, 1959. It is, therefore, clear that the
paid-up capital of the company during the assessment year cannot be said, for
purposes of Paragraph D of Part II of the First Schedule to the Finance Act,
1958, to.
be the paid-up capital of the year in which
the profits arose and from which dividends were distributed during the
assessment year." Before dealing with the contentions advanced, it may be
appropriate to refer to the relevant provisions. According to. section 55 of
the Indian income-tax Act, 1922, in addition to the income-tax 7--1458SCI/76 82
charged for any year there shall be charged, levied and paid for that year in
respect of the total income of the previous year of any individual, Hindu
undivided family, company, local authority, unregistered firm or other association
of persons, not being a registered firm, or the partners of the firm or members
of the association individually, an additional duty of income-tax (in this Act
referred to as super-tax) at the rate or rates laid down for that year by a
Central Act. Clause (b) of section 2 of the Finance Act, 1958 (Act No. 11 of
1958) provides, inter alia, that subject to the provisions of subsections (2)
and (3) with which we are not concerned, for the year beginning on the first
day of April 1958.
"(b) super-tax shall, for the purposes
of section 55 of the Indian Income-tax Act, 1922 (XI of 1922) (hereinafter
referred to as the Income-tax Act), be charged at the rates specified in Part
II of the First Schedule." We are concerned in the present case with
Paragraph D of Part II of the First Schedule to the Finance Act, 1958. The relevant
part of the above paragraph reads as under:
RATE OF SUPER-TAX In the case of every other
company,-RATES OF SUPER-TAX On the whole of the total income ..................
50%: Provided that ,-(i) ...............
(ii) a rebate at the rate of 40 per cent on
so much of the total income as consists of dividends from a subsidiary Indian
company and a rebate at the rate of 30 per cent on the balance of the total
income shall be allowed in the case of any company which satisfies condition
(a) but not condition (b) of the preceding clause;
(iii)...............
Provided further that,-(i) the amount of the
rebate under clause (i) or clause (ii) shall be reduced by the sum, if any,
equal to the amount or the aggregate of the amounts, as the case may be,
computed as hereunder:
..............
..............
(c) in addition, in the case of a company
referred to in clause (ii) of the preceding proviso which has distributed to
its shareholders during the previous year dividends in excess of six per cent
of its paid-up capital, not being dividends payable at a fixed rate-83 (A) in
the case of a company which is not such as is referred to in sub-section (9) of
section 23A of the Income-tax Act :-on that part of the said dividends which
exceeds 6 per cent, but does not exceed 10 per cent of the paid-up capital;
at the rate of 10% on that part of the said
dividends which exceeds 10 per cent of the paid-up capital;
at the rate of 20% Explanation.--For the
purpose of this paragraph(i) ...................
(ii) ...................
(iii) where any portion of the profits and
gains of the company is not included in its total income by reason of such
portion being exempt from tax under any provision of the Income-tax Act, the
'paid-up capital' of the company, the amount distributed as dividends (not
being dividends payable at a fixed rate), the amount representing the face
value of any bonus shares and the amount of any bonus issued to the
shareholders shall each be deemed to be such proportion thereof as the total
income of the company for the previous year bears to its total profits and
gains for that year other than capital receipts, reduced by such allowances as
may be admissible under the Income-tax Act which have not been taken into
account by the company in its profit and loss account for that year." In
appeal before us Mr. Desai on behalf of the appellant has urged that dividend
having been distributed during the accounting year relevant to the assessment
year in question, it is the profits and gains of that year alone which should
be taken into consideration for calculating the rebate in the levy of
super-tax. The fact that such dividend was distributed out of the profits
earned in the years prior to that was, according to. the learned counsel,
irrelevant. Particular stress in this context has been laid upon the language
of clause (iii) of the Explanation contained in Paragraph D of Part II of the
First Schedule to the Finance Act,1958. As against that, Mr. Ramachandran who
has argued the case amicus curiae has canvassed for the correctness of the view
taken by the High Court.
We have set out above the relevant part of
Paragraph D of Part II of the First Schedule to the Finance Act, 1958.
The language in which the above paragraph is
couched is so complex and is hedged in with so many exceptions and provisos
that it can hardly be regarded as a model of clarity in legislative
draftsmanship. Paragraph D initially prescribes the rate of super-tax at 50 per
cent on the total income of the company. The first proviso then makes 84
provision for rebate in the assessment of the super-tax.
The rebate for a company like the respondent
with no income in the form of dividend from a subsidiary company is to be at
the rate of 30 per cent. The second proviso carves out reduction in the rebate.
Clause (c) of that proviso sets out the formula for calculating that reduction
at a sliding scale in case the amount of distributed dividend exceeds 6 per
cent of the paid-up capital. There then follows a third proviso but we are not
concerned with that. At the end comes the Explanation consisting of three
clauses. For the purpose of the present case, the relevant clause is (iii).
The said clause makes provision in cases
which fall within its ambit for a further reduction in the reduction mentioned
above. To put it in other words, the paragraph seeks to prescribe the rate of
super-tax. It then proceeds to grant some relief to the tax payer in the levy
of . super-tax.
It thereafter makes a cut in that relief.
Finally, it prescribes a cut in that cut. The intelligence of even those with
legal background gets staggered in this continuous process of carving
exceptions to exceptions. It seems more like a conundrum, baffling the mind and
requiring special acumen to unravel its mystique. One can only wonder as to how
the ordinary tax payers, most of whom are laymen, can keep abreast of such
laws. Yet the maxim is that everyone is presumed to know the law. The one
redeeming feature is that the above pattern was given up after 1959. From 1960
to 1964 there was another pattern. Since 1965 the charge of super-tax has been
discontinued and the rates of income-tax have been so increased as to absorb
fully the former levy of super-tax.
The fate of these appeals, as would appear
from the above, depends upon the wording of clause (iii) of the Explanation.
The said clause contemplates, inter alia, that in calculating the amount deemed
to have been distributed as dividends, certain proportion of the amount
actually distributed has to be taken into. account. The said clause, shorn of
the portions with which we are not concerned, reads as under:
Where any portion of the profits and gains of
the company is not included in its total income by reason of such portion being
exempt from tax under any provision of the Income-tax Act, ......the amount
distributed as dividends ..... shall..be deemed to be such proportion thereof
as the total income of the company for the previous year bears to its total
profits and gains for that year other than capital receipts, reduced by such
allowances as may be admissible under the Income-tax Act which have not been
taken into account by the company in its profit and loss account for that year.
The above clause provides a formula which has
to be applied for determining the amount of dividends which shall be deemed to
have been distributed in considering the quantum of rebate for assessing the
super-tax payable by a company. The occasion for applying this formula is indicated
by the opening lines of the clause and arises when any portion of the profits
and gains of the company 85 is not included in its total income by reason of
such portion being exempt from tax under the provisions of the Income-tax Act.
Once such an occasion arises, we have to apply the formula contained in the
tatter part of the clause. According to that formula, the amount distributed as
dividends shall be deemed to be such proportion thereof as the total income of
the previous year bears to its total profits and gains for that year other than
capital receipts, reduced by certain allowances with which we are not
concerned. The words "for the previous year" and "for that
year" indicate that in finding for the purpose of rebate the amount of
dividends which shall be deemed to have been distributed, we have to look to
the figure of total income and the amount of profits and gains other than
capital receipts of the company reduced by certain allowances in the previous
year alone and not earlier years.
Clause (iii) introduces a fiction with regard
to the amount of dividends which shall be deemed to have been distributed. Such
a fiction can operate only within the limits prescribed by the language of the
statute creating that fiction. The language used in clause (iii) points to the
conclusion that the taxing authorities have to take into account the company's
total income and the profits and gains other than capital receipts reduced by
certain allowances only in the previous year, i.e., the year in which the
dividend was distributed. The fact that those profits and gains accrued in
years prior to the previous year and included portions which were exempt from
tax under the provisions of the Income-tax Act would not be of much relevance
as the language of the clause requires the taxing authorities to look to the
position of profits and gains in the previous year alone. We would, therefore,
modify the answer given by the High Court to question No. (1) and answer the
aforesaid question in the negative. The correct answer, in our opinion, should
be that for computing the reduction in rebate under Paragraph D of Part II of
the First Schedule to the Finance Act, 1958 the position of profits and gains
as it existed in the previous year should be taken into account and not in the
years prior to that.
No arguments have been addressed before us on
the answer to question No. (2).
We accordingly accept the appeals, set aside
the judgment of the High Court and answer question No. (1) in the negative as
indicated above. The parties in the circumstances shall bear their own costs in
this Court and in the High Court.
M.R. Appeals allowed.
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