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1976 Supreme(SC) 442
SUPREME COURT OF INDIA
H.R. KHANNA AND V.R. KRISHNA IYER, JJ.
The Commissioner of Income-tax, Madras, Appellant
Versus
M/s. P. S. S. Investments (P) Ltd., Respondent.
Civil Appeals Nos. 1853 (A) and 1854 of 1971,
D/- 9-11-1976.
Advocates appeared
Mr. V. S. Desai, Sr. Advocate, (M/s. J. Ramamurthi and M. N. Shroff, Advocates with him), for Appellant; Mr. T. A. Ramachandran, Advocate, Amicus curiae, for Respondent.
J.RAMAMURTHY, M.N.SHROFF, T.A.Ramachandran, V.S.DESAI
Headnote:
Indian Income-tax Act, 1922 - Section 66 (1) - First Schedule to Finance Act, 1959 - Finance Act, 1958 - Quantum of rebate - Right in holding that for computing reduction in rebate - Whether Appellate Tribunal was right in law in holding that paid up capital of assessed company should be proportionately reduced for purpose of reducing rebate in Corporation Tax in the manner directed - Whether on facts and in the circumstances of case Appellate Tribunal was right in holding that for computing the reduction in rebate under Para D of Part II to First Schedule to Finance Act, 1959 and of Finance Act, 1958 in composition of profits of year from which dividend had been declared should be looked into - Matter relates to assessment of respondent company for the assessment years - For sake of convenience court may set out facts relating to the assessment year - It is the common case of parties that the decision about that year would also govern the point of controversy relating to the other year - Assessed is a private limited company - In the previous year ending on December relevant for the assessment year it declared a dividend - Its paid up capital - Assessed company objected to the above computation of the super tax and took the matter in appeal to Appellate Assistant Commissioner - It was urged on behalf of assessed that the dividend declared during the year ending was out of the profits of the previous year which ended on December - According to assessed dividend income determined for the assessment year which included capital giants to the extent - Dividend it was urged should be apportioned between the capital gain and the other income after taking into account the tax payable thereon – Held, Fate of these appeals as would appear from above depends upon the wording of clause (iii) of the Explanation - Said clause contemplates, inter alia, that in calculating the amount to have been distributed as dividends certain proportion of the amount actually distributed has to be taken into account - Said clause shorn of the portions with which we are not concerned - 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 - Amount distributed as dividends shall be deemed to be such proportion thereof as the total income of the company for 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 - 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 - 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 company 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 latter 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 - 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 court have to look to the figure of total income and amount of profits and gains other than capital receipts of 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 - 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 in which the dividend was distributed - 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 Income-tax Act would not be of much relevance as language of clause requires the taxing authorities to look to the position of profits and gains in the previous year alone - Court would therefore modify answer given by High Court to question No. (1) And answer the aforesaid question in negative - Correct answer, in court opinion should be that for computing the reduction in rebate under paragraph D of Part II of First Schedule to the Finance Act, 1958 position of profits and gains as it existed in previous year should be taken into account and not in the years prior to that - Appeals allowed
Judgment
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 (1971) 79 ITR 456 (Mad)) answering the following two questions referred to it in two references under Section 66 (1) of 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 Finance Act, 1959 (in R. A. No. 169 of 1965-66) 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."
2. 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 13,277.00
Less rebate @30% on Rs. 26,554 7,966.20
Reduction in rebate:
Up to 6% 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% ...16500.00
17,160.00
Balance carried forward to next year 9,193.80
3. The assessee company objected to the above computation of the supertax and took the matter in appeal to the Appellate Assistant Commissioner. It was urged on behalf of the assessee that the dividend of Rs. 99,000 declared during the year ending 1957 was 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 gainst 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:
Rs.
Capital receipts not assessable 44,279
Capital gains assessed less tax 75,423
Other income less tax 22,492
1,42,194
The assessee claimed that rebet should be reduced only with reference to the sum of Rs. 15659 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
4. The Appellate Assistant Commissioner accepted in principle the assessees 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 Rupees 75,423 with the sum of Rs. 22,492 as shown below:
Rs.
Net available profits attributable to assessed income (22,492 + 75,423) 97
