Commissioner of Income-Tax, Madras v. S. S. Sivan Pillai and Others

Judgment

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2321 to· 2324 of 1966. Appeals from the judgment ~order dated August 2, '1965 of the Madras High Court in Tax Cases Nos. 198 to 201 of 1962 (References Nos. 114 to 117 of 1962). B. Sen, G. C. Sharma, R. N. Sacht~ey and B. D. Sharma, fol" the appellant (in all the appeals). Gobind Das and Lily Thomas, for the respondents (in all theappeals). The Judgment of the Court was delivered by · Shah, J. Sri Ganapathy Mills to. Ltd. distributed divident to its shareholders out of the bu$iness profits earned by it in the years ending December 31, 1953 and December 31, 1954. The Company however carried in its accounts a large balance of unabsOrbed depreciation admissible un~r s. lO(Z)(vi) and s. 10(2)(vi-a) of.the Income-tax Act, and on that account it had·: no taxable income iii the relevant assessment years 1954-55 and 1-955-56.

In. assessing the income of the shareholders for the assessment years 1955-56 and 1956-57 the Income-tax Officer rejected their claim for exemption from taX'under s. 15-C(4) of the Incometax Act, 1922, and brought the dividend income to tax. This order was confirmed by the Income-tax Appellate. Tribunal. The Tribunal referred the following question to the High Court of Madras for opinion : "Whether on the facts and in the circumstances . of the case, the assessees are entitled to the benefit ot SUPREME COllllT REPORTS (1971] I S.C.R. s. 15·C( 4) in respect of the dividend income received from Sri Ganapathy Mills Co. Ltd., Tinnevelly ?" 'The High Court answered the question in the affirmative. The .Commissioner of Income-tax has appealed to this Court with u .certificate under s. 66;! '.2) of the lnco~e-tax Act, In the year ending December 31, 1953, the Company had earned in its business transactions a profit of Rs. 87,184, but it J1ad no taxable profits, for the depreciation for the current and the previous years amounted to Rs. 2,83,343 which was an adnmsibje allowance in the computation of income under s.

I 0 of the Income-tax Act. Since full effect could not be given to the .allowance, the Company was entitled to add to the depreciation for the following year the unabsorbed depreciation of Rs. 1,96,159 under s. 10(2l(vi) proviso (b). In the year ending Dec~mber 31, i954, the Company earned a profit of Rs. 4,36,821 .and the depreciation admissible for the year was Rs. 2,41.809. Taking into account the unabsorbed depreciation of the previous year in computing the taxable income, it was found that the Company had suffered a loss of Rs. 1,147. Accordingly the Company had no taxable profits in .either of the two years and so tax wa' levied from the Company. But the Company had still distributed .dividend out of profits earned by it and the taxing authoritie.; levied tax on the dividend received by the shareholders. The answer to the question referred to the Tribunal depend. upon the true interpretation of s. 15-C of the Indian Income·tax Act, 1922.

Section 15-C of the Income·tax Act. insofar as it i' irelevant, provid0'3 : "(I) Save as otherwise hereinafter provided, the tax shall not be payable by an assessee on so much of the profits or gains derived from any industrial undertaking to which this section applies as do not exceed six per cent per annum on the capital employed in the undertaking, computed in accordance with such rules as may hr made. in this behalf by the Central Board of Revenue. (2) ( 3) The profits or gains of an industrial undertaking to which this i;ection aoplies shall b~ com'luted in accordance with the provisions of section I 0. ( 4) The tax shall not be payable by a sharec holder in respect of so lll.llCh-of any dividend paiti or -deemed tc be paid tO-bim by an industrial undertaking C.I. T. V. s. PILLAI (Shah, J.) as is attributable to that part of the profits or g~s on which the tax is not payable under tqis section. The Company was an industrial undertaking to which s. 15-C applied.

It had in the two relevant years derived from the ind1.1strial undertaki$1g no profits OJ' g~s within the meaning of sub-s. ( 1) read with sub-s. ( 3) of s. 15-C. The profits or gains derived horn the industrial undertaking within the meaning of sub-s. ( 1) of s. 15-C are not business profits : they, are· taxable profits com" puted in accordance with the provisions of s. 10 of the Income· tax Act. Under s. 15-C (1) 1;10 tax is payable by the industrial undertaking on its taxable proft~ equal to six per 9ent per annum of the capital emplqyed. Sub-sect.ion ( 4) of s. 1.5-C ex,m.pi,, the lhareholders of an industrial undertaking to which.· 1. 15-C applies, from liability to pay tax in respect of the dividend paid or deemed to be paid as· 1s attributable to $.at part Of the pioftts 01· gains on which the tax is not pa:i:able under s. 15.C(l>. Exemptio11 under s. 15-C ( 1) from payment of incomo-tax is not related to the business.profits: it is related to the taxabte pro· fits.

The language of sub-s. (3) is clear : the profits or gains of an industrial 1•ndertaking have to be .determined under s: .. lOtQf the Act. Even if the undertaking has earned profits out. of its commerical activity, if it has no taxable profits it cannOt claim exemption from payment of tax under sub-s. (1) of s. 15-C; and if the undertaking cannot claim the benefit under sub-s. ( 1) the shareholders will not 'et the benefit of sub-s. ( 4), for there is no dividend paid which 1s attributable to that part of the profits or gains on which the tax was not payable by the ·undertaking. The Companr had no taxable profit in the year of accounts it did not accprd111gly qualify for exemption from payment of tax under sub-s. (1) and smce there was no such taxable profit, the dividend received by the shareholders could not be said to be attributable to tl\at part of the profits or gains on which the tax was not payable under sub·s. (1). On the plain tenns of s.

15-C the shareholden cannot obtain the benefit of exemption from payment of tax. We are unable to agree with the High Court that In deter- · mini11g the profits of lil}e Company the unabsorbed depreciation of the previous yean will not be taken Into account. Section 10 of the Income-tax Act, insofar as it is relevant, provides : " ( 1 ) The till shall ~ payable PY an aiaessee under . the head ·"Profits and gains of business. pi'Qteision or vocation'' in ~c~ of. the proftts .. or gains Of any business, profession or vocaticin carried on by· him. Ll2SupCI 70-14 [1971] l S.C.R. ( 2) Such profits or gains shall be computed after making the following allowances, namely :- Clause ( vD deals with depreciation allowance in respect of buildings, machinery, plant or furniture· being the property of the assessee, at a sum equivalent to such percentag,e on the original cost thereof as may be prescribed. Under cl.

(vi-a) in respect of buildings newly erected, or of machinery or plant being new "'lu::h had been installed after March 31, 1948, a further sum whi-.h is deductible in determining the written down value equal · to the amol!nt admissible under cl. (vi) is· allowable. If the depreciation under els. (vi) and ( vi·a) cannot be given full effect m any year owing to there being no profits or gains chargeable for· that year, or owing to the p~ofits or gains chargeable being iC611 than the allowan9e, then subject to the provisions of cl. (b) of the proviso to sub-s. (2) of s. 24, the allowance or part of the allowance to which effect has not been given, as the case may be, shall be. addc:d to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance.

It tion· of an year is to be deemed depreciation for the succeeding year into the account of which it is carried forward, and the aggregate of the depreciation for the year of assessment and th;e unabsorbed depreciation of the previous year is deemed to be depreciation allowance for the year of assessment. The High Court, however, said that in computing the profits of the year of an industrial undertaking for determining whether the benefit of exemption under s. 15-C(l) is admissible, the unabsorbed depreciation cannot be taken into account. J.'he High Court observed: "In effect, it computing the profits or gains for the purpose of section 15-C (1) and ( 4) the only allowances that could be made in respect of current year's additional or extra depreciation under section ·10(2> (vi-a). The set off of losses under section 24(2) and ajlowances in respect of unabsorbed depreciation both under section 10(2) (vi) and 10(2) (vi-a) would not enter into the computation under section 15-C(3).

It is true that when the net result of assessment on the company is taken there is 'nil' profit and there might be no occasion at all for the application of section 15-C. But, in our view, it does not follow from it that on that ground the benefit of that section can be denied to the shareholders if on a computation of the profits and gains of the industrial undertaking under 8 C.I •. T. V. S. PILLAI (Shah, J.) section 15-C ( 3), the company had made profits out of which dividends had been paid to its shareholders. Where the company has 'nil' profits under its final assessment, the non-application of section 15-C is not due the fact that it made no profits and it was not entitled to the benefit of section 15-C (1). But, in view of the overall r~lt of the assessment, there is no need tor the c:ompany ·to cTaim exception under that provision, as there is no, tax liability at all.

Viewed from this angle, we consider that the shareholders are entitled to take the position· of the profits or gains of the company as computed under sub-section (3l of section I 5-C and subject to the limits provided by that sub·section, and claim the benefit under section 15·C(4)." The opinion of the High Court that .in computing the profits of an industrial undertaking under s. 10, unabsorbed depreciation for the previous years must be ignored, is inconsistent with the plain terms of s. 10(2)(vi) proviso (b). Again the assumption that the rig':J.t to claim allowance of unabsorbed depreciation arises out of s. 24(2) of the Act is in our judgment erroneous. Under the scheme of s. 15-C the profits or gains of an industrial undertaking must be determined under and in the manner provided by s. 10 of the Income-tax Act. For that purpose all t)le allowances under sub-s. (2) must be taken into account, and the resultant amount forms a component of the taxable profit. If by proviso (b) to s.

10(2)(vi) the unabsorbed depreciation of the previous year is deemed depreciation for the subsequent year, there is no room for making any . distinction between the unabsorbed depreciation for the previous year and the depreciation for the current year. The right to appropriate the profits towards the unabsorbed depreciation of the orevious year p not arise under s. 24(1>; it arises by vi.rtue of s. 10(2)(vi) proviso (b). We are also unable to agree with the High Court that if an industrial undertaking has distributed dividend, the shareholders will be entitled to exemption from payment of tax on that divi· dend, even if the Company is not entitled to claim exemption ·from liability to pay tax under sub-s. ( 1) of s. 15-C. The nght of the shareholders to obtain,the benefit of exemption under s. 15-C(4) depends upon the Comoany obtainine; the benefit of exemption under sub-s. (1) of s. 15-C, for the exemption froll! paym~n! of tax on the dividend received by the sharehold~t;'.

IS adm1ss1bl~ only on that part of the profits or gains on w1'1r •• the tax not payable by the Company-under st1h-· , • 1. SUPREME COUR'f REPORTS Se;tion 24(2) proviso (b) on which reliance was placed has, in our judgment, no application. Thai proviso enacts : "Provided that-- (b) where depreciation allowance is, under clause (b) of thj:_ proviso to clause (vi) of sub-section (2l of section 10, also to be carl'ied •forward, effect shall first be given to' the· provisions of . this sub-section." Sub·s~ti~n (2) of s. ·24 deals .with "the carry•forward of losses" and proviso (b) to s. 24(2) ·sets .out th~. sequence in which the losses carried forward and the depreciation allowance . which remains unabsorbed in the previous year are to be allowed. Whether any practical effect may be given· to the terms of proviso (b) to. s. 24(2), in the view which this Court has taken in Commissiqner of Income-tax, Calcutta v. Jaipur/a China Clay ·Mines (P) Ltd. ( 1) is a matter on which we need express no opinion.

If on its plaiµ teril!s, proviso (b) to s. 24(2) deals merel,Y with prio· rity and does not convert what is unabsorbed depreciation of the previous year which is deemed to be depreciation for the current year into loss for the purpose of carry-forward," sub-s. (2> of s. 24 proviso (b) presents no difficulty in the present case. This Court in Jaipuria China Clay Mines' case(') held that unabsorbed depreciation of past years cannot be kept out of accouqts in determining tl;te net income of an assessee for a parti- . cular year; it has to be set off against the profits from other heads. In that case the assessee had for the year 1952-53 a total business income of ·Rs. 14,000 odd and the depreciation · amounted to Rs. ~.360. The assessee COJllpany had a large dividend incomes. The tax•payer claimed that the unabsorbed depreciation of the previous year ,OOu!d be deducted from the· dividend income and the total income liable to tax be reduced. The Income-tax Officer rejected the claim.

This Court observed that the Income-tall: Act draws n.o <Jjsliinction between the various allowances mentioned in s.10(2); they all have to be deducted from the gross profi!s an\i pins of a business. Accordingly the unabsor~ed. depreciation Qf the put years must be ~ to the depreciation of the clirrent y~. and tli~ agare~e. of the un'!-bsorbed depreciation · atid, the current year's depreciation must be deducted ff9nf ·the total income of the year relevQ.11.t to the 11ssessment year .in question. If the profits do not wipe out the depreciation, the profit and 10ss B&count would show a loss; The Court further observed that "carry-fprward of depreciation is provided for" in s. IO (2) (vi), and s. 24(2) only deals with !0sses other than the losses. (I)" 59 I.T.R. 5SS. C.I.T. V. S. PILLAI (Shah, J.) d~e. to ~epreciation.

That. decision ~!early establishes that deprec1auon m respect of a busmess has m the first instance to be set off as an a}lowance against the profits from the business, professum or vocation." If the depreciation exceeds the profits and there is no other income from any other head, the depreciation may be carried forward to the next year. If, there is a profit from some other head, then the unabsorbed depreciation of a particular year under the head "Profits and gains of the business, profession or vocation" will be set off against such other income. .Jn the case in hand, the Company had no other source of income. - The dep!'e!:iation allowanc~ admissible in the assess· ment years exceeded· the busfoess profits. The Company had no taxable profit in the .two years in question. The Company could not claim exetn)?tion from payment of tax provided in s.

15-C (1); and no dividend hiving been distributed out of the taxable profits there was no dividend. attributable to that part of the pro· fits which were exempt from t!'X in the hands of the shareholders. The answer to the question su'!m1itted by the Tribunal is recorded in the negative. The appeals must therefore be allowed. Havin~ regard to the circumstances of the c11se, the plirties will bear their own costs in this Court and in the High Cou11. Appeals al/ol!'ed. G. C. J