the Commissioner of Income-Tax, Bombay v. the Jalgaon Electricity Supply Co., Ltd.

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 477 of 1957. Appeal from the judgment and order dated September 9, 1955, of the Bombay High Court in Income-tax Reference No. 37/x of 1954. K. N. Rajagopal Sastri and D. Gupta, for the appellant. N. A. Palkhivala, B. K. B. Naidu and I. N. Shroff, for the respondent. [1960] z960 1960. May 4. The Judgment of the Court was delivered by Commissioner of HIDAYATULLAH, J.-This appeal is with a certifi' Income-tax. Bombay cate granted by the High Court against its judgment . . and order dated September 9, 1955, in a reference Jalgaon Electricity 66(1) th I d' I t Th supply co. Ltd. un er s. o n ian ncomeax Tribunal had referred the following questions for the Hidayatullah J. decision of the High Court: "(1) Whether there was any excess dividend declared by the assessee Company? (2) Whether the assessee Company is liable to pay additional income-tax in respect of the excess dividend paid by the assessee Company ? "

The High Court answered the first question in the affirmative and the second, in the negative. The Commissioner of Income-tax, Bombay is the appellant before us, and the Jalgaon Electric Supply Co., Ltd. (the assessee Company) is the respondent. The facts of the case are simple. For the assessment years 1949-50 and 1950.51, the book profits of the ii.ssessee Company were respectively Rs. 1,22, 469 and Rs. 76,886. After adjustment of depreciation allowance and other deductions, the income of the assessee Company was finally assessed at Rs. 3,423 and Rs. 3,312 respectively. The assessee Company declared a dividend of Rs. 46,024 in the first year and Rs. 56,326 in the next. The Income-tax Officer, applying the Proviso to Para. B of Part I of the Third and :First Schedules of the Finance Acts, 1949 and 1950 respectively, assessed the difference in each year to additional income-tax, and charged income-tax at the rate of 5 annas in the rupee on the amounts for the two assessment years.

The assessee Company appealed first to the Appellate Assistant Commissioner and then to the Tribunal. In the Tribunal, there was a difference of opinion between the President and the Accountant Member, the former holding that the assessee Company was not liable and the latter, that it was. The case was then referred to a third Member, who agreed with the President. The main reason for the decision of the majority was that there were no profits in the years .preceding .the previous year, and that, therefore, the said Paragraphs could not, on their terms, operate in t.he circumstances. The view of the minority was that I96o even if there were no profits, the intention of the Finance Act to levy the additional income-tax on the Co'f'n7~:.:!~;:;, ''f excess dividends was perfectly plain, and that the Bombay assessee Company was liable. It may be mentioned th d · • f th T, 'b d jalgaon Electricity :i.t t 1s stage t at e ecrs10n o n una urne supply co.

Ltd. entirely upon the fact that no profits were brought forward from the previous years, and that, therefore, Hidayatullah J. the Paragraphs could not be applied. The High Court held that though excess dividends were, in fact, paid, the absence of profits from previous years rendered the Finance Act unworkable in this case. It, therefore, accepted the reasons given by the Tribunal, and upheld its decision. Paragraph B of Part I of the First Schedule of the Finance Act, 1950 corresponds to the corresponding Paragraph of the Finance Act, 1949. It is, therefore, not necessary to refer to them separately. We shall confine ourselves to the Finance Act, 1949. It may also be pointed out that the circumstances of the two years are also on par, except that the amounts of income and the excess dividends are different. The paragraph reads as follows: " B. In the case of every company- Rate On the whole of total income ...... Five annas in the rupee:

Provided that in the case of an Indian Company- (i) where the total income, as reduced by seven annas in the rupee and by the amount, if any, exempt from income-tax, exceeds the amount of any dividends (including dividends payable at a fixed rate) declared in respect of the whole or part of the previous year for the assessment for the year ending on the 31st day of March, 1950, and no order has been made under sub-section (1) of section 23A of the Income-tax Act, a rebate shall be allowed at the rate of one anna per rupee on the amount of such excess; (ii) where the amount of dividends referred to ·in clause (i) above exceeds.the .total inconw as reduced by seven annas in the rupee and by the· amount, if .. any, exempt from income-tax, there shall be charged Commissioner of Income-tax, · Bombay J algaon Electricity Suppl."Y Co. Ltd. · idayatullah J. [1960] 'i-~ on the total income an additional income-tax equal to the sum, if any, by which the aggregate amount of income-tax actually borne by such excess (hereinafter referred to as 'the excess dividend') falls short of the amount calculated at the rate of five annas per rupee on the excess dividend.

For the purposes of the above proviso, the expression 'dividend' shall have the meaning assigned to \ it in clause (6A) of section 2 of the Income-tax Act, .l. ,- but any distribution included in that expressioi1, made during the year ending on the 31st day of March, 1950, shall be deemed to be a dividend declared in respect of the whole or part of the previous year. For the purpose of clause (ii) of the above proviso, the aggregate amount of income-tax actually borne r--. by the excess dividend shall be determined as follow·s:- (i) the excess dividend shall be deemed to be out of the whole or such portion of the undistributed profits of one or more years immediately preceding the previous year as would be just sufficient to cover the amount of the excess dividend and as have not likewise been taken into account to cover an excess L..-, dividend of a preceding year;

(ii) such portion of the excess dividend as is deemed to be out of the undistributed profits of each of the said years shall be deemed to have borne tax,- (a) if an order has been made under sub-section (1) of section 23A of the Income-tax Act, in respect of the undistributed profits of that year, at the rate of five annas in the rupee, and (b) in respect of any other year, at the rate applicable to the total income of the company for that year reduced by the rate at which rebate, if an~-, was allowed on the undistributed profits. " The scheme of the Finance Act in relation to excess dividends and their chargeability to additional ......_. income-tax has been examined by us in Civil Appeal No. 427 of 1957 decided today. We are concerned in this c1,1.se with the application of the second Proviso 3 S.C.R. to the Paragraph, read with the explanations (not sor960 called), which set out the manner of calculation of Commissioner of the tax.

As we have already pointed out in the other Incomet<1:r, case, the additional income-tax is payable if dividends Bumbay in excess of the limit fixed by the legislature are paid Th' dd't' t Jalgaon Electricity m any year. is a I 10na mcomeax a es note supply :co. Lid. of such tax as might have been paid on the profits, albeit at a lower rate, in any previous assessment ffidayatullah ]. year and gives dedl_lction for that amount. The additional income-tax is payable on the excess dividends calculated at a different rate but allowing for the tax already paid. For this purpose, the aggregate amount of income-tax to be borne by the excess dividends has to be calculated in a particular manner.

This manner is indicated in the Paragraph, and it begins by providing that the excess dividend shall be deemed to be out of the whole or such portion of the undistributed profits of one or more years preceding the previous year as would be just sufficient to cover the amount of the excess dividend and were not likewise taken into account to cover an excess dividend of a previous year. It is then provided that the excess dividends which are so deemed to be the undistributed profits of each of the previous years shall be deemed to have borne the tax. The fictions which have been introduced postulate that there should be undistributed profits of one or more years immediately preceding the previous year, that such undistributed profits should be sufficient to cover the amount of excess dividend actually paid out in the previous year under assessment, and that the undistributed profits should not have been taken likewise to cover an excess dividend of any other previous year.

Where there are no profits of any preceding year or years, the fiction wholly fails and the method of calculation, equally so. We do not agree with the argument of the Commissioner that the fiction can be given effect to, even if the profits of preceding years do not exist. The argument suggests that the chargeability of excess dividends to additional income-tax can arise under the terms of the Paragraph even in such circumstances. But a plain reading of the Proviso clearly shows that the excess IIS [1960] z96o dividends have first to be connected with the profits of the preceding years and then the tax borne on Commissioney of h Income-tax, t ose profits has to e found out, and the tax is pay.

Bombay able at an enhanced rate and amounts to the difference between the tax actually borne by the profits J algaon lilectricitv d bl p T supply co. ua: an t at eman a e un er t e aragraph. he High Court repelled the argument of the Commis- Hidayatullah J. sioner in much the same way as we have done, and we entirely agree with the reaso,ns given by it. The Accountant Member, whose decision was in a minority, gave two reasons. The first was that "the explanation provides for the determination of the years out of the profits of which the excess dividend has come", and the second was that "in order to escape the liability imposed by Cl. (ii), the company must prove that the excess dividend has borne tax 5 annas in the rupee as it is only in that event that the additional tax payable will be nil". These reasons were also put before us for acceptance. We are, however, unable to agree. The fiction cannot be whittled down in the manner suggested in the first reason.

The fiction incorporates within itself not only what the Accountant Member says but also a mode of calculation, which is not a part of the fiction. It is the mode of calculation which cannot be given effect to, though we would go further and say that the fiction itself fails because no profits of preceding years at all existed. The second reason given by the Accountant Member assumes the liability to pay tax, and ·that is not permissible, because that is the fact in issue to be decided. That fact can only be decided if the Paragraph can be made applicable to the present case and not otherwise. We cannot start with the assumption that additional in.come-tax on excess dividend has got to be paid, whether the Paragraph applies or not. That would be begging the very question to be decided.

The Commissioner also suggested numerous modifications of the language to give effect to the intention to levy additional income-tax on excess dividends, and pointed out, as did the Accountant Member, that it would be unjust to allow an escapement of tax, where there were no profits of preceding ye.ars, to set off 3 S.C.R. against the excess dividends. In our opinion, the z960 question of modification of the language cannot arise Commissioner of in the circumstances of the case. Our reasons have .Income-tax, - been given in Civil Appeal No. 427 of 1957, decided to- Bombay day, and we need not go over the ground again. Th 1 1 d Th Jalgaon Electricity ere is a so no ques 10n o unJUS ness invo ve . e supply co. Ltd. Income-tax law seeks to p11t in the net certain class of income, and can only successfully do so, if it frames Hidayatullah J. a provision appropriate to that end.

If the law fails and the tax-payer cannot be brought within its letter, no question of unjustness as such, arises. The answers given by the High Court to the two questions were correct in the circumstances of the case. In the result, the appeal fails, and will be dismissed with costs. Appeal dismissed . KA V ALAPPARA KOTTARATHIL KOCHUNI AND OTHERS THE STATE OF MADRAS AND OTHERS (B. P. SINHA, c. J., JAFER IMAM, A. K. SARKAR, K. SUBBA RAO and J. C. SHAH, JJ.) Marumakkathayam Law-Enactment for removal of doubts- Constitutional validity-Madras Marumakkathayam (Removal of Doubts) Act, I955 (32 of r955)-Constitution of India, Arts. r9(r) (f), ]I, 3rA. These petitions by the holder of Kavalappara Sthanam, his wife, daughters and son challenged the constitutional validity of the Madr8s Marumakkathayam (Removal of Doubts)

Act, 1955, passed by the Madras Legislature soon after the Privy Council had declared the properties in possession of the Sthanee to be Sthanam properties in which the members of the tarwad had no interest. Section 2 of the Act, which contained the substantive provision, was as follows:-- " 2. Notwithstanding any decision of Court, any sthanam in respect of which :- ~a) there is or had been at any time an intermingling of the properties of the sthanam and the properties of the tarwad, or (b) the members of the tarwad have been receiving maintenance from the properties purporting to be sthanam properties as of right, or in pursuance of a custom or otherwise, or (c) there had at any time been a vacancy caused by there being no male member of the tarwad eligible to succeed to the Sthanam, I960 May 4.