Cloth Traders (P) Ltd. Vs. Addl.
Commr. of Income Tax, Gujarat-I [1979] INSC 113 (4 May 1979)
BHAGWATI, P.N.
BHAGWATI, P.N.
DESAI, D.A.
KOSHAL, A.D.
CITATION: 1979 AIR 1691 1979 SCR (3) 984 1979
SCC (3) 538
CITATOR INFO :
O 1985 SC1585 (1,TO,8,10,12,13,16,TO,18,19,2
RF 1992 SC 803 (21)
ACT:
Income Tax Act, 1961 (43 of 1961)-Sections
85A & 80M- Whether rebate of imcome tax admissible on the amount of
divident received by the assessee company from an Indian company or whether
confined only to divident income as computed under the Act after making the
deduction on the interest paid on borrowings for making the investments.
HEADNOTE:
The earliest provision granting exemption of
super-tax in respect of intercorporate dividends was made as far back as 9th
December, 1933 in a Notification issued by the Governor General in Council and
it provided as follows:
"The Governor General in Council is
pleased to exempt from super-tax.
(i) so much of the income of any investment
trust company as is derived from dividend paid by any other company which has
paid or will pay super-tax in respect of the profits, out of which such
dividends are paid." This Notification was followed by a provision of a
similar kind granting exemption from super-tax in respect of certain specified
categories of inter corporate dividends introduced as s. 56A in the Indian
Income Tax Act, 1922.
When this Act was repealed and the present
Act enacted with effect from 1st April, 1962 s. 99, sub-section (1) was
introduced in the present Act exempting certain categories of income from
super-tax and one of such categories was that set out in cl. (iv). Section 99,
sub-section (i) cl. (iv) read as follows:
"99(1) Super Tax shall not be payable by
any assessee in respect of the following amounts which are included in his
total income- (iv) if the assessee is a company, any dividend received by it
from an Indian Company, subject to the provisions contained in the Fifth
Schedule." This provision continued to be in force up to 31st March, 1965
subject to a minor inconsequential amendment made by Finance Act, 1964, but by
an amendment made by Finance Act 10 of 1965, the provision was omitted and
Chapter VI-A and s. 85A were introduced in the present Act with effect from 1st
April, 1965. Chapter VIA comprised ss.
80A to 80D providing for certain specified
deductions to be made in computing total income while s. 85A provided for
deduction of tax on inter-corporate dividends.
The original Chapter VIA and certain other
sections including s. 85A were deleted from the present Act by Finance (No.2)
Act, 1967 with effect from 1st April, 1968 and replaced by a new Chapter VIA
which contains a fasciculus of sections from s. 80A to s. 80VV. Section 80A,
sub-section (1) provides that 985 in computing the total income of an assessee
there shall be allowed from his gross total income, in accordance with and
subject to the provisions of Chapter VIA, the deductions specified in s. 80C to
s. 80VV and sub-section (2) of that section imposes a ceiling on such
deductions by enacting that the aggregate amount of such deductions shall not,
in any case, exceed the gross total income of the assessee. The expression
"gross total income" is defined in cl. (5) of s. 80B to mean the
total income computed in accordance with the provisions of the Act before
making any deduction under Chapter VIA or under s. 280. O Section 80M is the
new section which corresponds to the repealed s. 85A and it provides for
deduction in respect of certain categories of inter-corporate dividends. There
were several amendments made subsequently in this section but they relate
primarily to the percentage of the income to be allowed as a deduction.
One amendment that was made by Finance Act,
1968, was that the words "received by it" occurring in sub-section
(1) of s. 80M were omitted with effect from 1st April, 1968. The Finance Act of
1968 also provided in sub-section (2) and (3) of s. 31 that notwithstanding the
omission of s. 99, sub- section (1), cl. (iv) and s. 85A, the provisions of
these sections shall have and be deemed always to have effect, subject to the
modification that the words "received by it" in the opening part of
these sections were deleted. The net effect of these amendments was that the
words "received by it" following upon the words "dividend"
were omitted with retrospective effect from s. 99 sub-section (1), cl. (iv) and
s. 85A and s. 80M was to be read as if the words "received by it"
were not in the opening part of that section.
The Gujarat High Court having taken a view
against the assessees (appellants), appeals were preferred against the judgment
relating to the assessment years 1965-66 and 1966- 67 when s. 85A was in force.
In view of the conflict of opinion between
the view of the Gujarat High Court, and the view taken by the Bombay, Madras
and Calcutta High Courts, the Income Tax Appellate Tribunal, referred similar
matters under s. 257 of the Act to this Court.
In the appeals and references before this
Court, the question was whether on a true interpretation of Sections 85A and
80M of the Income Tax Act, 1961, rebate of income tax is admissible on the
actual amount of dividend received by an assessee, being a company, from an
Indian company, or it is confined only to the dividend income as computed in
accordance with the provisions of the Act, that is after making the deductions
specified in s. 57 including deductions of the interest paid on borrowings for
making the investments.
Allowing the appeals and answering the
questions referred by the Tribunal in favour of the assessees:
^ HELD: 1. The assessees are entitled to
relief under s.
85A for the assessment years 1965-66, 1966-67
and 1967-68 and under s. 80M for the assessment years 1968-69 and 1969- 70 in
respect of the entire amount of dividend income without deductions of interest
paid on borrowings for acquiring the shares.
[1006 B]
2. Sections 85A and 80M were not written by
the Legislature on a clean slate, nor were they the outcome of any new or
innovative exercise of legislative judgment, but they were preceded by similar
provisions granting rebate of super-tax or income tax on inter-corporate
dividends and these provisions as 986 interpreted by the Courts throw light on
the true meaning and content on ss. 85A and 80M. [99 F].
3. It is clear from the Notes on cl. 31 which
subsequently became s. 31 of the Finance Act, 1968, that the amendments
retrospectively deleting the words "received by it" from the opening
part of s. 99, sub-section (1), cl.
(iv) and s. 85A were made with a view to
widening the scope of the relief granted under these sections, as it was felt
that the presence of these words might render these sections inapplicable in
cases where the shares to which the dividend relates are registered in the name
of a person other than the assessee and the dividend is, therefore, received
strictly speaking, by such other person and not by the assessee. The object of
introducing these amendments was to widen the scope of the tax relief provided
under s. 99, sub- section (1), cl. (iv) and s. 85A by making it available to the
assessee even though the shares to which the dividend related were registered
in the name of a person other than the assessee and not to narrow it down by
restricting it to net dividend computed after making deductions allowable under
the provisions of the Act.
[998-E-G].
4. Even after the deletion of the words
"received by it", the expressions "any dividend from an Indian
company" and "any income by way of dividends from an Indian
company" occurring in the opening part of these sections continue to mean
the same thing, namely, the full amount of dividend derived or obtained from an
Indian company. The decisions of the Bombay, Calcutta and Madras High Courts
interpreting these sections cannot, therefore, be said to be displaced by the
retrospective omission of the words "received by it." [998 H-999 B].
5. It is clear on a plain natural
construction of the language of s. 99 sub-section (1), cl. (iv), that it grants
exemption from super-tax in respect of "any dividend from an Indian
company" and these last mentioned words cannot mean anything else than the
full amount of dividend derived from an Indian company. They cannot obviously
mean dividend from an Indian company minus any expenses incurred in earning it,
or less any other deduction allowable under the Act. [999 C- D].
6. The words, "the following amounts
which are included in his total income", in the opening part of s. 99,
sub- section (1) do not have any limitative effect so as to restrict
"dividend from an Indian company" in respect of which exemption from
super-tax is granted to dividend computed in accordance with the provisions of
the Act and forming part of the total income. The exemption from super- tax
granted under s. 99 sub-section (1) is not only in respect of "dividend
from an Indian company" referred to in cl. (iv), but also in respect of
other items of income mentioned in clauses (i) to (iii) and (v).
[999 E].
7. The legislature clearly wanted to provide
that the different categories of income mentioned in clauses (i) to (v) should
be eligible for exemption from super-tax, only if they are included in the
total income and the Legislature could have made such a provision separately in
respect of each category of income in the opening part of s.99 sub- section
(1), but instead of adopting such legislative device, which would have been
both inapt and inelegant, the Legislature chose to use an omnibus expression,
"the following amounts which are included in his total income", which
would cover all the different items of income dealt with in clauses (i) to (v).
[999 F-G].
8. It would, therefore, seem that though the
exemption from super-tax granted under clause (iv) of sub-section (i) of s. 99
would be applicable only if the particular item of income namely,
"dividend from an Indian company' is included in total income, what is
exempted is "dividend from an Indian company" which can only mean the
full amount of dividend received from an Indian company. [1000 B].
Commissioner of Income Tax, Kerala v. South
India Bank Ltd., 59 ITR 763; referred to.
9. Section 85A in its opening part by using
the words "where the total income of an asessee..... includes any income
by way of dividends, from an Indian Company", lays down a condition for
its applicability, which is that the total income must include income by way of
divdend from an Indian company. It is only if this category of income forms a
component part of total income that the provisions enacted in the section is
attracted and the assessee becomes entitled to rebate on income calculated with
reference to the "income so incduded". [1001 F].
10. The meaning of the section would become
clear if the words "income by way of dividends from an Indian
company", are substituted for the words "income so included."
Then it would be obvious that the rebate on income tax is to be calculated by
applying the average rate of tax to the "income by way of dividends from
an Indian company" which can only mean the full amount of dividend
received from an Indian company. [1002 B-C].
Commissioner of Income Tax v. Indian
Guarantee & General Insurance Co Ltd., 903 ITR 348 approved.
11. There is a close similarity between s.
85A and s. 80M so far as the opening part of the two sections is concerned, but
in the latter part, there is a difference inasmuch as s. 85A provides for
calculation of rebate of income tax on "income so included", while s.
80M provides for deduction of the whole or part of "such income by way of
dividends". The language employed by the legislature in s. 80M leaves no
doubt that the deduction, whether whole or 60 per cent, is to be calculated
with reference to the entire amount of income by way of dividends. [1002 D-E].
12. Section 80M occurs in Chapter VIA which
is headed "Deduction to be made in computing total income". The
marginal note to the section, indicates, that it provides for deduction in
respect of certain inter-corporate dividends. [1002 F, 1003 C].
13. Section 80A sub-section (1) provides that
in computing the total income of an assessee, the deductions specified in s.
80C to 80VV shall be made from his gross total income, and gross total income,
according to the definition in s. 80B, cl. (5) means the total income computed
in accordance with the provisions of the Act before making any deduction under
Chapter VIA or under s. 280.O.
What s. 80A, sub-section (1) requires is that
first the total income of the assessee must be computed in accordance with the
provisions of the Act without taking into account the deductions required to be
made under Chapter VIA or under s. 280.O. and then from the gross total income
thus computed, the deductions specified in s. 80C to 80VV must be made in order
to arrive at the total income. But sub-section (2) of s. 80A provides that the
aggregate 988 amount of the deductions required to be made under Chapter VIA
shall not exceed the gross total income of the assessee so that the total
income arrived at after making the deductions specified in s. 80C to 80VV from
the gross total income can never be a minus or negative figure. This provision
imposing a ceiling on the deductions which may be made under sections 80C to
80VV clearly postulates that in a given case the aggregate amount of these
deductions may exceed the gross total income. [1002 G-1003 B].
14. The words "where the gross total
income of an assessee....includes any income by way of dividends from a
domestic company" are intended only to provide that a particular category
of income, namely, income by way of dividends from a domestic company should
form a component part of the gross total income. These words merely prescribe a
condition for the applicability of the section namely, that the gross total
income must include the category of income described by the words "Income
by way of dividends from a domestic company". If the gross total income includes
this particular category of income, whatever be the quantum of such income
included, the condition would be satisfied and the assessee would be eligible
for deduction of the whole or 60 per cent of "such income". [1003
F-G].
15. The words "such income" as a
matter of plain grammar must be substituted by the words "income by way of
dividends from a domestic company", in order to arrive at a proper
construction of the section and if that is done, it would be obvious that the
deduction is to be in respect of the whole or 60 per cent of the "income
by way of dividends from a domestic company" which can only mean the full
amount of dividends received from a domestic company. The deduction permissible
under the section is, therefore, to be calculated with reference to the full
amount of dividends received from a domestic company and not with reference to
the dividend income as computed in accordance with the provisions of the Act,
that is, after making deductions provided under the Act. [1004 B-C].
16. If the Legislature was of the view that
the deduction should not be in respect of the full amount of dividends received
from a domestic company, but it should only be in respect of the amount of
dividend computed after deducting allowable expenditure, the legislature would
have undoubtedly amended s. 80M, sub-section (1) and made its intention quite
clear. [1005 C].
17. The legislature in fact amended s. 80M
several times in respect of other matters subsequent to the decision of the
Bombay High Court in the New Great Insurance Cols case and the decision of the
Madras High Court in the Madras Auto Service's case, but it did not choose to
amend the lannguage employed in s. 80M, sub-section (1) for the purpose of
overriding the interpretation placed by the courts. This indicates legislative
recognition of the interpretation placed by the Courts on s. 85A and s. 80M.
[1005 D-E].
18. Section 80K read with rule 20, s. 80MM,
s. 80N and s. 80.O which occur in the same group of sections as s. 80M, use the
same legislative formula as s. 80M and open with the identical words
"where the gross total income of an assessee-includes any income." It
appears on a plain reading of these sections that the deduction admissible is
in respect of the whole of the income 989 received by the assessee and not in
respect of the income computed after making the deductions provided under the
Act.
[1005 F-G] Madras Auto Service v. Income Tax
Officer, 101 ITR 589;
approved.
CIVIL APPELLATE JURISDICTION: Civil Appeal
Nos. 117-118 of 1975.
(From the Judgment and Order dated 28-11-1973
of the Gujarat High Court in I.T.R. No. 21 of 1972).
TAX REFERENCE NO. 2 OF 1975 (From the Tax
Reference made by the Income Tax Tribunal Ahmedabad against its order dated
7-7-1973 in I.T.A. No. 643 (AHD)/71-72).
TAX REFERENCE NOS. 6-9 OF 1975 (From the Tax
Reference made by the Income Tax Tribunal Ahmedabad in R. A. Nos.
103-106/AHD/74-75 arising out of I.T.A. Nos. 946-949/AHD/72-73 for Assessing
years 1966-67 to 1969-70).
TAX REFERENCE NO. 16 OF 1975 (From the Tax
Reference made by the Income Tax Tribunal, Ahmedabad in Reference Application
No. 62/AHD/74- 75 arising out of I.T.A. No. 580/AHD/72-73).
TAX REFERENCE NO. 18 OF 1975 (From the Tax
Reference made by the Income Tax Appellate Tribunal, Ahmedabad Bench in R.A.
No. 271/AHD/74- 75 arising out of I.T.A. No. 2431/AHD/72-73 decided on 29-7- 74
assessment year 1969-70).
CIVIL APPEAL NOS. 117-118/75 For the
Appellant : Mr. B. Sen, I. N. Shroff and H. S.
Parihar.
For the Respondent : S. N. Kacker, Sol. Gen.,
B. B.
Ahuja and Miss A. Subhashini.
For the Interveners : (1) Ramakrishna Sons
Ltd.: S. P.
Mehta, T. A. Ramachandran and M/s. J.
Ramachandran, (2) M/s.
Jardine Henderson Ltd.: Dr. Debi Pal and D.
N. Gupta, (3) Indore Exporting & Importing Co. Ltd. : Dr. Debi Pal, Miss
Bina Gupta and Mr. Praveen Kumar, and (4) Ketu Investments (P) Ltd. : S. T.
Desai, Mrs. A. K. Verma and J. B. Dadachanji, K. J. John and Shri Narain.
TAX REFERENCE NO. 2 OF 1975 For the Appellant
: S. N. Kacker, Sol. Genl, S. P. Nayar and Miss A. Subhashini.
990 For the Respondent : F. S. Nariman, I. N.
Shroff, and H. S. Parihar.
For the Interveners : (1) M/s. Jardine
Henderson Ltd.:
Dr. Debi Pal and D. N. Gupta, (2) Indore
Exporting & Importing Co. Ltd. : Dr. Debi Pal, Miss Bina Gupta and Mr.
Praveen Kumar, and (3) M/s. Ajay Investment
Co. : Praveen Kumar and Miss Bina Gupta.
TAX REFERENCE NOS. 6-9 OF 1975 For the
Appellant : F. S. Nariman, I. N. Shroff, and H. S. Parihar.
For the Respondent : S. N. Kacker, Solicitor
General, S. P. Nayar and Miss A. Subhashini.
For the Intervener Central India Industries :
Dr. Debi Pal, Miss Bina Gupta and Mr. Praveen Kumar.
TAX REFERENCE No. 16 OF 1975 For the
Appellant : Mrs. A. K. Verma and J. B. Dadachanji, K. J. John and Shri Narain.
For the Respondent : S. N. Kacker, Sol. Genl.
and Miss A. Subhashini.
For the Interveners-Central India Industries
: Dr. Debi Pal, Miss Bina Gupta and Mr. Praveen Kumar.
TAX REFERENCE NO. 18 OF 1975 For the
Appellant : S. P. Mehta, K. C. Patel, Shri Narain, J. B. Dadachanji, Mrs. A. K.
Verma and Miss Arti Mehta.
For the Respondent : Miss A. Subhashini.
For the Intervener-Central India Industries
Ltd : Dr. Debi Pal, Miss Bina Gupta and Mr. Praveen Kumar.
The Judgment of the Court was delivered by
BHAGWATI, J.-This group of appeals and References raises a short question of
construction of sections 85A and 80M of the Income Tax Act, 1961 (hereinafter
referred to as the present Act). The question is whether on a true
interpretation of these sections, rebate of income tax is admissible on the
actual amount of divident received by an assessee, being a company, from an
Indian company, or it is confined only to the dividend income as computed in
accordance with the provisions of the Act, that is, after making the deductions
specified in section 57 including deduction of the interest paid on borrowings
for making the investments. The Gujarat High Court has taken a view against the
assessee while a different view has been taken by the 991 Bombay, Madras and
Calcutta High Courts. The appeals are preferred by the assessee, namely, Cloth
Traders (P) Ltd.
against the judgment of the Gujarat High
Court and they relate to the assessment years 1965-66 and 1966-67 when section
85A was in force. The Reference before us have been made directly by the
Tribunal under section 257 of the Act in view of the conflict of opinion
amongst the High Courts.
Out of these References, three are at the
instance of the assessees, namely, C. V. Mehta (P) Ltd., M/s. Distributors
(Baroda) Pvt. Ltd., and H. K. (Investment) Co. Pvt. Ltd. and one is at the
instance of the Commissioner of Income-tax, Gujarat. They relate to different
assessment years:
assessment year 1969-70 in case of C. V.
Mehta (P) Ltd. and Distributors (Baroda) Pvt. Ltd. and assessment years 1965-66
to 1969-70 in case of H. K. (Investment) Co. Pvt. Ltd. The interpretation of
both sections 85A and 80M is involved in these References since section 85A
with some minor alterations made in it from time to time was in force during the
assessment years 1965-66 to 1967-68 and section 80M followed upon it with
effect from the commencement of the assessment year 1968-69 as part of Chapter
IVA. Though the language of sections 85A and 80M is almost identical, there are
some verbal dissimilarities, but as we shall presently point out, they do not
make any difference in interpretation so far as the present question is
concerned.
We are concerned in these appeals and
References only with the interpretation of sections 85A and 80M but in order to
arrive at the true interpretation of these sections, it is necessary to refer
briefly to the history of the legislation enacted in these sections, since
these sections were not written by the Legislature on a clean slate, nor were
they the outcome of any new or innovative exercise of legislative judgment, but
they were preceded by similar provisions granting rebate of super tax or income
tax on inter-corporate dividends and these provisions as interpreted by the
courts throw light on the true meaning and content of sections 85A and 80M.
The earliest provision granting exemption of
super-tax in respect of inter-corporate dividends was made as far back as 9th
December, 1933 in a Notification issued by the Governor General in Council and
it provided as follows:
"The Governor General in Council is
pleased to exempt from super-tax- (i) so much of the income of any investment
trust company as is derived from dividend paid by any other company 992 which
has paid or will pay super-tax in respect of the profits out of which such
dividends are paid." This provision came up for consideration before a
Division Bench of the High Court of Bombay in Commissioner of Income Tax v.
Industrial Investment Trust Co. Ltd.(1) and the question was whether the
dividend income exempted from super-tax was the entire income by way of
dividend received by an investment trust company or the dividend income as
computed in accordance with the provisions of the Act, that is, after deducting
the expenses incurred in earning it. The High Court of Bombay held that the
"dividend income which was exempted under the notification would be the
dividend income received by the assessee and not the said income less any
further amounts", because "the notification must be regarded as a
self-contained one and not controlled by any other provisions of the Act"
and there was "no warrant to construe the word 'Income' in the
notification as total income, nor to qualify the dividend income specified in
the said notification as the dividend income computed under section 12 of the
Act". It was thus held that the entire amount of dividend received by an
investment trust company would be exempt from super-tax and not the amount of
dividend minus the expenses incurred in earning it. This Notification was followed
by a provision of a similar kind granting exemption from super-tax in respect
of certain specified categories of inter-corporate dividends introduced as
section 56A in the Indian Income-tax Act, 1922 (hereinafter referred to as the
Old Act) by Finance Act, 1953. It is not necessary to make any detailed
reference to this provision since there is no decided case which has considered
this provision or expressed an opinion upon it.
When the old Act was repealed and the present
Act enacted with effect from 1st April, 1962, section 99, sub- section (1) was
introduced in the present Act exempting certain categories of income from
super-tax and one of such categories was that set out in clause (iv). Section
99, sub- section (1), clause (iv) read as follows:
"99(1) Super-tax shall not payable by an
assessee in respect of the following amounts which are included in his total
income.
(iv) if the assessee is a company, any
dividend received by it from an Indian company, subject to the provisions
contained in the Fifth Schedule".
993 This provision continued to be in force
upto 31st March, 1965 subject to a minor inconsequential amendment made by
Finance Act, 1964. Now a question arose before the High Court of Bombay in
Commissioner of Income Tax v. Indian Guarantee & General Insurance Co.
Ltd.(1) whether the exemption granted under this provision was in regard to the
entire amount of dividend received by the assessee from an Indian company or it
was limited to the dividend income computed in accordance with the provisions
of the Act and forming part of total income. The argument of the assessee based
on the words 'any dividend received by it from an Indian company' was that it
was the full amount of dividend received by the assessee which was exempt from
super-tax, while the Revenue relying on the words "amounts which are
included in his total income" contended that it was only the amount of
dividend computed in accordance with the provisions of the Act and forming part
of total income which was entitled to the benefit of exemption under this
provision. The High Court accepted the contention of the assessee and pointed
out that on a plain reading of sub- clause (iv) of sub-section (1) of section
99 it was clear that the exemption from super-tax was granted in respect of "any
dividend received by it from an Indian company" and these last words,
according to their plain grammatical construction, could mean only one thing,
namely, the entire amount of dividend received by the assessee from an Indian
company and nothing less. The High Court emphasised the word
"received" following immediately upon the word 'dividend' and
observed that the use of this word also showed that the exemption was in regard
to the dividend received and not in regard to the "dividend received minus
the expenses". The High Court pointed out that the words "amounts
which are included in his total income" in the opening part of section 99
sub-section (1) did not have any limitative effect, but they were used merely
as a convenient mode of describing the different items of income set out in
clauses (i) to (v) of that sub-section. Clauses (i) to (v) referred to
different items of income which were sought to be exempted from super- tax
under subsection (1) of section 99 and it was only if these items of income were
included in the total income of the assessee that the question of exemption
from super-tax would arise and hence the legislature used the general words
"amounts which are included in his total income" in the opening part
of sub-section (1) of section 99 as an omnibus formula to cover these different
items. These words according to the High Court were descriptive of the items of
income included in the computation of the total income and were not indicative
of the quantum 994 of the amounts of the different items included in such
computation and they did not, therefore, have the effect of cutting down the
plain natural meaning of the words "any dividend received by it from an
Indian company" which represented the quantum of income in respect of
which exemption from super-tax was granted under the section. This view,
observed the High Court, not only followed logically and inevitably from the
words used in the statutory provision, but was also in consonance with the
object of the legislation, which was to prevent double taxation of the amount
of dividend with the view to encouraging investment by companies in the share
capital of other companies. It may be pointed out that the same view in regard
to the construction of clause (iv) of sub-section (1) of section 99 was taken
by the Calcutta High Court in Commissioner of Income-tax v. Darbhanga Marketing
Co.(1) and it was held that under that provision, exemption from super-tax was
granted to an assessee in respect of "any dividend received by it"
which meant the full amount of dividend received by the assessee and not
"dividend received minus the amount of interest on monies borrowed for
earning the same". The Calcutta High Court observed: "The expressions
'which are included in his total income' in sub-section (1) of section 99 and
'incomes forming part of total income' in the heading are descriptive of the
items included in the computation of the total income and not indicative of the
quantum of the amounts included under the different items in the computation of
total income. Such a construction of these expressions would be in harmony wit
the obvious meaning of the expression 'dividend received'". The decision
of the Bombay High Court in Industrial Investment Trust Co's case (supra) was
strongly relied upon by the Calcutta High Court in coming to this decision and
the view taken by the Calcutta High Court was noted with approval by the Bombay
High Court in New Great Insurace Co's case (supra). The same view was also
taken by the Madras High Court in Commissioner of Income-tax v. Madras Motor
and General Insurance Co.
Ltd.(2) and it was approved in later decision
of the same Court in Madras Auto Service v. Income-tax Officer (3). It would,
thus, be seen that notwithstanding the words "amounts which are included in
his total income" in the opening part of sub-section (1) of section 99,
all the three High Courts, namely, Bombay, Calcutta and Madras took the view
that the entire amount of dividend received by the assessee from an Indian
Company was exempt from 995 super-tax and the exemption was not limited to
dividend income computed in accordance with the provisions of the Act and
forming part of the total income.
Section 99, sub-section (1) however remained
in force only up to the close of the assessment year 1964-65 and by an
amendment made by Finance Act 10 of 1965, section 99, sub- section (1) was
omitted and Chapter VI-A and section 85A were introduced in the present Act
with effect from 1st April, 1965. Chapter VI-A comprised sections 80A and 80D
providing for certain specified deductions to be made in computing total income
while section 85A, in so far as material, provides as follows:
"85A. DEDUCTION OF TAX ON
INTER-CORPORATE DIVIDENDS:-Where the total income of an assessee being a
company includes any income by way of dividends received by it from an Indian
company or a company which has made the prescribed arrangements for the
declaration and payment of dividends (including dividends on preference shares)
within India, the assessee shall be entitled to a deduction from the income-tax
with which it is chargeable on its total income for any assessment year of so
much of the amount of income-tax calculated at the average rate of income-tax
on the income so included (other than any such income on which no income-tax is
payable under the provisions of this Act) as exceeds an amount of twenty-five
per cent thereon;.. " There were some amendments made in section 85A by
Finance Act, 1966 but they are not material for our present purpose and we need
not refer to them. Section 85A also came to be considered by the Bombay High
Court in the New Great Insurance Co's case (supra) because two of the
assessment years with which the Bombay High Court was concerned in that case
were assessment years 1965-66 and 1966-67 when section 85A was in force. The
Bombay High Court pointed out that except for some minor verbal changes section
85A was almost in the same terms as section 99, sub-section (1), clause (iv),
the only real differences being that the exemption granted under section 99,
sub-section (1), clause (iv) was in regerd to super-tax, while the deduction
allowed under section 85A was in regard to income-tax. The same interpretation
was, therefore, placed on section 85A as in the case of section 99 sub-section
(1), clause (iv) and it was held that under section 85A, the assessee would be
entitled to de- 996 duction of income-tax in respect of the whole of the
dividend received from an Indian company. The expression "where the total
income ........ includes any income by way of dividends" in the opening
part of section 85A was construed as referring to the category of income by way
of dividends received from an Indian company so that if this particular
category of income is included in the computation of total income, the assessee
would be entitled to a deduction of so much of the amount of income tax
calculated at the average rate of incometax on the "income so
included" as exceeds an amount of twenty-five per cent of such income.
The words "income so included" were
read to mean not the quantum of the "income by way of dividends"
included in the total income but the income falling within the category of
"income by way of dividends from an Indian company" included in the
total income. Thus the view taken by the Bombay High Court was that under
Section 85A also, the deduction admissible was in respect of the entire
dividend received by the assessee from an Indian company and not in respect of
dividend income minus deductions allowable under the provisions of the Act in
computing the total income.
The original Chapter VI-A and certain other
sections including section 85A were deleted from the present Act by Finance
(No. 2) Act, 1967 with effect from 1st April, 1968 and replaced by a new
Chapter VI-A which contains a fasciculous of sections from section 80A to
section 80VV.
Section 80A, sub-section (1) provides that in
computing the total income of an assessee there shall be allowed from his gross
total income, in accordance with and subject to the provisions of Chapter VI-A,
the deduction specified in section 80C to section 80VV and sub-section (2) of
that section imposes a ceiling on such deductions by enacting that the
aggregate amount of such deductions shall not, in any case, exceed the gross
total income of the assessee. The expression "gross total income" is
defined in clause (5) of section 80B to mean the total income computed in
accordance with the provisions of the Act before making any deduction under
Chapter VI-A or under section 280.O. Section 80M is the new section which corresponds
to the repealed section 85A and it provides for deduction in respect of certain
categories of inter-corporate dividends. It is the interpretation of this
section which constitutes the subject matter of controversy between the parties
and hence it would be desirable to set it out in extenso. This section has
undergone changes from time to time since the date of its enactment and we
will, therefore, reproduce it in the form in which it was during the assessment
years 1968-69 and 1969-70 being the assessment years with which we are
concerned in these cases:
997 "80 M. DEDUCTION IN RESPECT OF
CERTAIN INTER- CORPORATE DIVIDENDS:
(1) Where the gross total income of an
assessee being a company includes any income by way of dividends received by it
from a domestic company, there shall, in accordance with and subject to the
provisions of the section, be allowed, in computing the total income of the
assessee, a deduction from such income by way of dividends of an amount equal
to- (a) where the assessee is a foreign company- (i) in respect of such income
by way of dividends received by it from an Indian company which is not such a
company as is referred to in section 10B and which is mainly engaged in a
priority industry......80% of such income (ii) in respect of such income by way
of dividends other than the dividends referred to in sub clause (i).........
65% of such income.
(b) where the assessee is domestic company in
respect of any such income by way of dividends.... 60% of such income."
There were several amendments made subsequently in this section but they relate
primarily to the percentage of the income to be allowed as a deduction and do
not have any bearing on the question of interpretation posed before us.
One amendment is, however, material and that
was made by Finance Act 1968 by which the words "received by it"
occurring in sub-section (1) of section 80M were omitted with effect from 1st
April, 1968. The Finance Act of 1968 also provided in sub-sections (2) and (3)
of section 31 that notwithstanding the omission of section 99, sub-section (1),
clause (iv) and section 85A, the provisions of those sections shall have and be
deemed always to have effect, subject to the modification that the words
"received by it" in the opening part of those sections were deleted.
The net effect of these amendments was that the words "received by
it" following upon the word "dividend" were omitted with
retrospective effect from section 99, sub-section (1), clause (iv) and section
85A and section 998 80M was to be read as if the words "received by
it" were not in the opening part of that section.
We shall presently consider the language of
section 80M for the purpose of arriving at its true interpretation, but before
we do so, we must refer to an argument advanced on behalf of the Revenue that
whatever might have been the interpretation placed on section 99, subsection
(1), clause (iv) by the Bombay, Calcutta and Madras High Courts and on section
85A by the Bombay High Court, it cannot hold good any more in view of the
retrospective deletion of the words "received by it" in the opening
part of these sections. The argument was that the decisions of the Bombay,
Calcutta and Madras High Courts upholding the view that the exemption from
super-tax under section 99, sub-section (1), clause (iv) and the deduction of
income-tax under section 85A were admissible in respect of the entire amount of
dividend received by an assessee without any deduction, were based on the words
"received by it" and since these words were retrospectively omitted,
these decisions could no longer be regarded as valid. We do not think this
contention of the Revenue can be sustained if we have regard to the object and
purpose for which the words "received by it" were deleted.
It is clear from the Notes on clause 31 which
subsequently became section 31 of the Finance Act, 1968 that the amendments
retrospectively deleting the words "received by it" from the opening
part of section 99, sub-section (1), clause (iv) and section 85A were made with
a view to widening scope of the relief granted under these sections, as it was
felt that the presence of these words might render those sections inapplicable
in cases where the shares to which the dividend relates are registered in the
name of a person other than the assessee and the dividend is, therefore,
received, strictly speaking, by such other person and not by the assessee. The
object of introducing these amendments was to widen the scope of the tax relief
provided under section 99, sub-section (1), clause (iv) and section 85A by
making it available to the assessee even though the shares to which the
dividend related were registered in the name of a person other than the
assessee and not to narrow it down by restricting it to not dividend computed
after making deductions allowed under the provisions of the Act.
The omission of the words "received by
it" does not, therefore, make any difference in the interpretation of
section 99, sub-section (1), clause (iv) and section 85A so far as the present
question is concerned. Even after the deletion of the words "received by
it", the expressions "any dividend from an Indian company" and
"any income by way of dividends from an Indian company" occurring in
the opening part of these sections continue to mean the 999 same thing, namely
the full amount of dividend derived or moving from an Indian company. The
decisions of the Bombay, Calcutta and Madras High Courts interpreting these
sections cannot, therefore, be said to be displaced by the retrospective
omission of the words "received by it".
So far as section 99, sub-section (1), clause
(iv) is concerned, we have no doubt that the interpretation placed on this
provision by the Bombay, Calcutta and Madras High Courts is correct. The
reasoning given by the Bombay High Court in New Great Insurance Co.'s case
(supra) is unexceptionable and we find ourselves in agreement with it.
It is clear on a plain natural construction
of the language of this provision that it grants exemption from super-tax in
respect of "any dividend from the Indian company" and these last
mentioned words cannot mean anything else than the full amount of dividend
derived from an Indian company. They cannot obviously mean dividend from an
Indian company minus any expenses incurred in earning it, or less any other
deduction allowable under the Act. It is no doubt true that the opening part of
section 99, sub-section (1) contains the words "the following amounts
which are included in his total income", but these words do not have any
limitative effect so as to restrict "dividend from an Indian company"
in respect of which exemption from super-tax is granted to net dividend
computed in accordance with the provisions of the Act and forming part of the
total income. It may be noticed that the ememption from supr-tax granted under
section 99, sub-section (1) is not only in respect of "dividend from an
Indian company" is not referred to in clause (iv), but also in respect of
other items of income mentioned in clauses (i) to (iii) and (v). The
Legislature clearly and understandably wanted to provide that the different
categories of income mentioned in clauses (i) to (v) should be eligible for
exemption from super-tax only if they are included in the total income and the
Legislature could have made such a provision separately in respect of each
category of income in the opening part of section 99, sub-section (1), but
instead of adopting such legislative device, which would have been both inapt
and inelegant, the Legislature chose to use an omnibus expression "the following
amounts which are included in his total income", which would cover all the
different items of income dealt with in clause (i) to (v).
These words were introduced merely to provide
that the category of income in respect of which exemption from super- tax is
claimed must be included in the total income and they were not intended to
refer to the quantum of such income included in the total income for exempting
it from supertax:
they were descriptive of items of income
included in the total 1000 income and were not indicative of the quantum of the
amounts included under different items in the computation of the total income.
It would, therefore, seem that though the exemption from super-tax granted
under clause (iv) of sub- section (1) of section 99 would be applicable only if
the particular item of income, namely, "dividend from an Indian
company" is included in the total income, what is exempted is
"dividend from an Indian company" which can only mean the full amount
of dividend received from an Indian company.
This view which we are taking is clearly
supported by the decision of this court in Commissioner of Income-tax, Kerala
v. South Indian Bank Ltd.(1) where the question was so as to the true
interpretation of a notification issued by the Central Government under section
60A of the old Act which was in the following terms:
"No income-tax shall be payable by an
assessee on the interest receivable on the following income-tax free loans
issued by the former Govermnent of Travancore or by the former Government of
Cochin, provided that such interest is received within the territories of the
State of Travancore Cochin and is not brought into any other part of the
taxable territories to which the said Act applies. Such interest shall,
however, be included in the total income of the assessee for the purposes of
section 16 of the Indian Income-tax Act, 1922." The argument of the
Revenue was that the exemption from income tax granted under this notification
was in respect of interest receivable on securities minus the expenses incurred
in earning it and not in respect of the entire amount of interest because it
was only that amount of interest arrived at after computation in accordance
with section 8 of the old Act which was includible in the total income and
liable to bear tax and the exemption from tax could, therefore, only be in
respect of such amount. This argument was negatived by the Court and it was
pointed out by Subba Rao, J., that: "this notification does not refer to
the provisions of section 8 of the Income-tax Act at all. It gives a total
exemption from income-tax to an assessee in respect of the interest receivable
on income-tax free loans mentioned therein. It gives that exemption subject to
two conditions, namely, (i) that the interest is received within the
territories of the State of Travancore Cochin, and (ii) that it is not brought
into any other part of the taxable territories. It includes the said exempted
interest in the total 1001 income of the assessee for the purpose of section 16
of the Income-tax A Act. Shortly stated, the notification is a self-contained
one; it provides an exemption from income-tax payable by an assessee on a
particular class of income subject to specified conditions. Therefore, there is
no scope for controlling the provisions of the notification with reference to
section 8 of the Income-tax Act. The expression "interest receivable on
income-tax free loans" is clear and unambiguous. Though the point of time
from which the exemption works is when it is received within the territories of
the State of Travancore-Cochin, what is exempted is the interest receivable.
"Interest receivable" can only mean the amount of interest calculated
as per the terms of the securities. It cannot obviously mean interest
receivable minus the amount spent in receiving the same." It may be noted
that the last part of this notification provided for inclusion "of such
interest", that is, interest in respect of which exemption from tax was
granted, in the total income of the assessee and obviously this would have to
be done after computation in accordance with the provisions of section 8 of the
old Act. But even so, it was held that the exemption from tax was in respect of
the entire amount of interest received on the securities. The reasoning adopted
in this decision clearly supports the view we are taking in regard to the
construction of clause (iv) of sub-section (1) of section 99 and we must hold
that the decisions of the Bombay, Calcutta and Madras High Courts lay down the
correct law on the interpretation of this provision.
The next provision we must consider is
section 85A which came in the wake of section 99, sub-section (1), clause (iv).
This section lays down a condition for its applicability in its opening part by
using the words "where the total income of an assessee-includes any income
by way of dividends from an Indian company". The condition is that the
total income must include income by way of dividends from an Indian company. It
is only if this category of income from a component part of total income that
the provision enacted in the section is attracted and the assessee becomes
entitled to rebate on income calculated with reference to the "income so
included". The argument of the Revenue was that the words "income so
included" must mean the quantum of the income included in the total income
and, therefore, rebate on income tax granted under section 85A can only be in
respect of dividend income computed in accordance with the provisions of the
Act and forming part of the total income and not in respect of the full amount
of dividend received by the assessee. This argument is, in our opinion,
fallacious. It is based on a misreading of the words "income so
included" and ignores the context in which these words occur. If the
opening part of the section refers to inclusion of the 8-409 SCI/79 1002
particular category of income denoted by the words "income by way of
dividends from an Indian company", the words "so included"
cannot have reference to the quantum of the income included, but they must be
held T.D. r.f. only to the category of income included, that is, income by way
of dividends from an Indian company. The meaning of the section would become
clear if we substitute the words "income by way of dividends from an
Indian company" for the words "income so included". Then it
would be obvious-indeed it would need no argument to hold-that the rebate on
income tax is to be calculated by applying the average rate of tax to the
"income by way of dividends from an Indian company" which can only
mean the full amount of dividend received from an Indian company. This was the
view taken by the Bombay High Court in the New Great Insurance Co.'s case and
we find ourselves in agreement with it.
We must now turn to consider section 80M for
the purpose of arriving at its true interpretation. There is a close similarity
between section 85A and section 80M so far as the opening part of the two
section is concerned, but when we come to the latter part, we find that there
is a difference, inasmuch as section 85A provides for calculation of rebate of
income tax on "income so included", while section 80M provides for
deduction of the whole or part of "such income by way of dividends".
Even if there by any doubt or ambiguity in regard h to the meaning of the words
"income so included" in section 85A, though we do 'not think that
there is any scope for such doubt or ambiguity, the language employed by the
Legislature in section 80M is much clearer and leaves no doubt that deduction,
whether whole or 60 percent, is to be calculated with reference to the entire
amount of income by way of dividends received from a domestic company. Section
80M occurs in Chapter VI-A which is headed "Deduction to be made in
computing total income".
Section 80A, sub-section ( 1 ) provides that
in computing the total income of an assessee, the deductions specified in
sections 80 to 80 VV shall be made from his gross total income and gross total
income, according to the definition in section 80B, clause (5), means the total
income computed in accordance with the provisions of the Act before making any
deduction under Chapter VI A or under section 280.O.
What section 80 A, sub-section (1) requires
is that first the total income of the assessee must be computed in accordance
with the provisions of the Act without taking into account the deductions
required to be made under Chapter VI-A or under section 280.O and then from the
gross total income thus computed, the deductions specified in sections 80 to 80
VV must be made in order to arrive at the total income. But sub- 1003 section
(2) of section 80 A provides that the aggregate amount of the deductions
required to be made under Chapter VI-A shall not exceed the gross total income
of the assessee so that the total income arrived at after making the deductions
specified in sections 80 to 80 VV from the gross total income can never be a
minus or negative figure. This provision imposing a ceiling on the deduction
which may be made under sections 80 to 80 VV clearly postulate that in a given
case the aggregate amount of these deductions may exceed the gross total
income. It is in the context of this background that we have to determine the
true interpretation of section 80 M, which, as the marginal note indicates,
provides for deduction in respect of certain intercorporate dividends. Section
80 M, sub-section (1) opens with the words "Where the gross total income
of an assessee-includes any income by way of dividends From a domestic
company" and proceeds to say that in such a case there shall be allowed in
computing the total income of the assessee a deduction "from such income
by way of dividends" of an amount equal to the whole of such income or 60
per cent of such income, as the case may be, depending on the nature of the
domestic company from which the income by way of dividends is received. Now the
words "such income by way of dividends" must be referable to the
income by way of dividends mentioned earlier and that would be income by way of
dividends from a domestic company which is included in the gross total income.
The whole of such income that is, income by way of dividends from domestic
company or 60 per cent of such income, as the case may be, would be deductible
from the gross total income for arriving at the total income of the assessee.
The words "where the gross total income of an assessee.... includes any
income by way of dividends from a domestic company" are intended only to
provide that a particular category of income, namely, income by way of
dividends from a domestic company, should form a component part of the gross
total income. These words merely prescribe a condition for the applicability of
the section, namely, that the gross total income must include the category of
income described by the words "income by way of dividends from a domestic
company." If the gross total income includes this particular category of
income, whatever be the quantum of such income included, the condition would be
satisfied and the assessee would be eligible for deduction of the whole or 60
per cent of "such income". Now, if the words "where the gross
total income of an assessee-includes any income by way of dividends from a
domestic company" in the opening part of the section refer only to the
inclusion of the category of income denoted by the words "income by way of
dividends from a domestic company" and not to the quantum of the income so
included, 1004 the words "such income" cannot have reference to the
quantum of the income included, but they must be held referable only to the
category of the income included, that is, income by way of dividends from a
domestic company. The words "such income" as a matter of plain
grammar must be substituted by the words "income by way of dividends from
a domestic company" in order to arrive at a proper construction of the section
and if that is done, it would be obvious that the deduction is to be in respect
of the whole or 60 per cent of the "income by way of dividends from a
domestic company" which can only mean the full amount of dividends
received from a domestic company. The deduction permissible under the section
is, therefore, to be calculated with reference to the full amount of dividends
received from a domestic company and not with reference to the dividend income
as computed in accordance with the provisions of the Act, that is, after making
deductions provided under the Act. This was the view taken by the Madras High
Court in Madras Auto Service v. Income-tax officer Madras(1) and it meets with
our approval. It is true that the Gujarat High Court has taken a contrary view
in Cloth Traders Pvt. Ltd. v. Commr.
Of Income-tax, Gujarat, which is the subject
matter of Civil Appeals Nos. 117 and 118 of 1975, but we think it proceeds on
an erroneous interpretation of the language of section 80M, sub-section (1). It
wrongly construes the words "such income" to be referable to the
quantum of income includible in the gross total income, overlooking the fact
that the opening words in the section, namely, "where the gross total
income of an assessee-includes any income by way of dividends from a domestic
company" refer only to the inclusion of the category of income by way of
dividend from a domestic company and they are not indicative of the quantum of
the income included in the gross total income. It is true that on this view the
deduction in respect of the income by way of dividends from a company falling
within cl.
(a) of sub-section (1) of s. 80M may exceed
the quantum of such income included in the gross total income, but that
possibility is indeed contemplated and taken care of by section 80A,
sub-section (2) which provides that the aggregate amount of the deductions
shall not in any case exceed the gross total income of the assessee.
We may point out that even though the
consistent view taken by the Bombay, Madras and Calcutta High Courts in regard
to the inter pretation of section 99, sub-section (1), clause (iv) was that the
exemption From super-tax under that provision was admissible in respect of (1)
101 I. T. R. 589.
1005 the full amount of dividends received
from an Indian company and A was not limited to the dividend income computed
accordance with the provisions of the Act and forming part of total income and
the same view was taken by the Bombay High Court in the New Great Insurance Co.
case (supra) in regard to the interpretation of s. 85A which contained the
opening words "where the total income of an assessee- includes any income
by way of dividends from an Indian company", similar to the opening words
in sub-section (1) of section 80M and the Madras High Court also placed the
same interpretation on section 80M, sub-section ( 1 ) in Madras Auto Service
case (supra), the legislature did not choose to make any amendment in the
language of section 80M, sub- section (1) with a view to setting at naught this
judicial interpretation. If the legislature was of the view that the deduction
should not be in respect of the full amount of dividends received from a
domestic company, but it should only be in respect of the amount of dividends
computed after deducting allowable expenditure, we have no doubt that the
legislature would have amended section 80M, sub-section (1) and made its
intention quite clear. The legislature in fact amended section 80M several
times in respect of other matters subsequent to the decision of the Bombay High
Court in the New Great Insurance Co.'s case and the decision of the Madras High
Court in the Madras Auto Service's case, but it did not choose to amend the
language employed in s. 80M, sub-s.(1) for the purpose of overriding the
interpretation placed by the courts. This would seem to indicate legislative
recognition of the interpretation placed by the courts on s. 85A and s. 80M and
it is a circumstance, though not of much weight, which lends support to the
view we are taking in regard to the interpretation of s. 80M.
We may also in this connection refer to
section 80K read with Rule 20, section 80 MM, section 80 N and section 80 o
which occur in the same group of sections as section 80-M. These sections use
the same legislative formula as section 80-M and open with the identical words
"where the gross total income of an assessee .. includes any income...
". It appears on a plain reading of
these secions that the deduction admissible is in respect of the whole of the
income received by the assessee and not in respect of the income computed after
making the deductions provided under the Act. Vide Madras Auto Service case
(supra) and Additional Commissioner of Income Tax v. Isthmian India Maritime P.
Ltd.(1). We derive considerable support for our view from the analogy of these
sections. H (1) (1978) 1131. T. R. 570 (Mad.) 1006 We, therefore, allow Civil
Appeals Nos. 117 and 118 of 1975 and answer the question referred to the
Tribunal in those appeals in favour of the assessee and against the Revenue. The
questions referred by the Tribunal in Tax References Nos. 2, 6 to 9, 16 and 18
of 1975 are also answered in favour of the assessee and against the Revenue.
We hold that the assessees in these appeals
and References are entitled to relief under section 85A for the assessment
years 1965-66, 1966-67 and 1967-68 under section 80M for the assessment years
1968-69 and 1969-70 in respect of the entire amount of the dividend income
without deduction of interest paid on borrowings for acquiring the shares. The Commissioner
will pay the costs of the appeals and the references to the respective
assessees.
N.V.K. Appeals allowed.
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