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PETITIONER: C.I.T. MADRAS

       Vs.

RESPONDENT: T.   V. SUNDRAM IYENGAR (P) LTD.

DATE OF JUDGMENT09/04/1975

BENCH: CHANDRACHUD, Y.V. BENCH: CHANDRACHUD, Y.V. SARKARIA, RANJIT SINGH GUPTA, A.C.

CITATION:  1976 AIR  255            1975 SCR   93  1976 SCC  (1)  17  CITATOR INFO :  F          1983 SC 420  (12)

ACT: Indian Income Tax Act. 1922, s. 23 A-Scope of.

HEADNOTE: Under Section 23A of the Indian income Tax Act, 1922, if  in respect   of  any  previous  year  the  profits  and   gains distributed  as dividends within the 12  months  immediately following the expiry of that previous year are less than the statutory  percentage of the total income of  that  previous year  as reduced by the amounts mentioned in cls.  (a),  (b) and (c) and sub-s. (1), the Income Tax Officer shall make an order  that the company shall be liable to pay super-tax  at the  prescribed  rate on the undistributed  balance  of  the total income of the previous year.  According to Explanation 2, statutory percentage means 45 per cent of the  industrial profits  and  60  per  cent  of  nonindustrial   profits.The explanation further says that the said percentages should be applied   separately  with  reference  to  the  amounts   of profits and gains attributable     to  the two parts of  the company’s business as if the said amounts were  respectively the  total income of the company in relation to each of  its parts,  the  amount  of  dividends  and  taxes  also   being similarly apportioned for purpose of sub-s. (1). In  the present case 45 per cent of the  industrial  profits comes to Rs. 1.51 lakhs, while 60 per cent of non-industrial profits  comes to Rs. 8.43 lakhs.  The company,  instead  of distributing  a  sum of Rs. 9.94 lakhs by way  of  dividends distributed  Rs.  4.20  lakhs, equally  as  profits  of  the industrial  and non-industrial activities leaving aside  the profit of Rs. 13.21 lakhs.  The income Tax Officer allocated the dividends declared by the company to the industrial  and non-industrial  segments  in  the  same  proportion  as  the profits of the two segments bore to the total profits of the company and levied additional super-tax under s. 23A on  the entire undistributed balance of the total profits  available for  distribution,  namely Rs. 13.21 lakhs.  The  Order  was confirmed by the Appellate Assistant Commissioner. On appeal, the Appellate Tribunal held that in so far as the profits  of  the  industrial activity  were  concerned,  the

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company  must  be  deemed  to have  distributed  by  way  of dividends  out  of those profits just so  much,as  would  be equal  to  45 per cent of such profits  and  accordingly  it allocated the dividend out of industrial and  non-industrial profits.  On this allocation it came to the conclusion  that the  company having declared the statutory dividend  on  its industrial profits, was not liable to pay additional  super- tax in so far as these profits were concerned.  It, however, upheld  the levy of additional super-tax  on  non-industrial profits. The High Court confirmed the Tribunal’s view. Allowing the appeal, HELD  : (1) The High Court was in error in holding that  the profits of the two parts of the company’s business should be treated as if they were the total income of the company for all purposes.  In taking this view the High Court overlooked the concluding words of Explanation 2 by reason of which the legal  fiction  has  to be limited  to  its  duly  appointed purpose. [106 D-E]. (2)  The  High Court and the Tribunal were wrong in  holding in favour of the assessee.  Where a company has a  composite business,  the first step is to ascertain the  distributable profits  of  the two parts separately.  For the  purpose  of finding  out the minimum dividend that the company ought  to have   distributed,  the  proper  statutory  percentage   as prescribed by Explanation 2 has to be applied separately  to the  distributable  profits  of the two  parts,  as  if  the respective  profits are the total income of the  company  in relation  to  each  part of  its  business.   The  composite dividend distributed by the company has then to be 94 apportioned  between the two parts in the same ratio as  the respective profits of the two parts bear to the toal profits of the company. [103H-104B]. (3)(a) Explanation 2 by its express terms requires that  for the  purpose of sub-s. (1) the amount of dividends  must  be "similarly apportioned". [101 E] (b)  The  word "similar" may generally be said to be a  word of ambiguous import in  the sense that the mere  stipulation in a statute that something should be   done  similarly   is insufficient  by itself to signify the degree of  similarity with  which that thing must be done.  The  words  "similarly apportioned" mean apportioned with reference to the  amounts of  profits  and gain attributable to the two parts  of  the company’s  business.   The Explanation first  refers  to  an apportionment  or  splitting up and then provides  that  the dividends and taxes shalt be similarly apportioned, that  is to   say,  similarly  split  up.   Accordingly,  the   words "similarly apportioned" have a definite meaning and are  not ambiguous. [101G-102 C]. (c)  The  word "apportion" is used in Explanation 2  in  the sense  of "split up" so that "similarly  apportioned"  means "similarly split up ". The dividends have, therefore, to  be split up similarly, i.e. in the same ratio as the industrial and  non-industrial  profits bear to each  other  after  the total  profit is split up in two parts, industrial and  non- industrial. [102D-E] ((1)  An  assignment as a proper portion  of  the  dividends would mean an assignment in the same or similar ratio as the respective  profits of the- two segments bear to  the  total profits  of the company.  It is not open to the  company  to split  up and apportion the dividends to the Profits of  the two  segments  in such a manner as it  finds  convenient  or thinks   fit.   The  company’s  freedom  to  apportion   the dividends  is conditioned by the ratio which the profits  of

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the two segments bear to the total profits. [102 F-G] The  sum  of Rs. 4.20 lakhs has to be split up in  the  same proportion which the respective profits of the two  segments bore to the total profits of the company.  There is a short- fall  in  respect of both the segments and  accordingly  the company  would be liable to pay additional super-tax at  the rate  of 37 per cent on the entire undistributed balance  of the distributable profits. [102 H-103 B]. (4)(a) The language of s. 23A(1) as also of Explanation 2 is clear  and  distinct  and does not yield to  more  than  one reasonable  interpretation.   The  fiction  created  by  the Explanation  is expressly limited to the purposes of  sub-s. (1)  and there is no justification for pursuing the  fiction to  its  logical conclusion so as to permit  it  to  operate beyond the limited purpose of sub-s. (1).  Under the  scheme contained in s. 23A where a company has a composite business it  is  necessary  at the outset to  find  out  the  profits attributable  to  the  two  parts  of  its  business.    The statutory  percentages as prescribed by Explanation  2  have then  to  be applied separately to the profits  of  the  two parts.   By reason of the fiction created by Explanation  2, the  profits  of each part have, for this purpose,  and  for this purpose alone, to be treated as if they were the  total income  of that part of the Company’s business.   By  sub-%. (1)  the company becomes liable to pay additional  super-tax if  the  dividends  distributed by it  are  "less  than  the statutory  percentage of the total income".   Explanation  2 creates  the fiction that for the purpose of sub-s. (1)  the income  of  the respective parts is to be  regarded  as  the total income of each part so that the statutory  percentages can  be applied separately to the income of each part.   The fiction  operates  in  this limited field and  is  in  terms created for this limited purpose. [105D-106 B]. (b)  The  levy of additional super-tax under s.23A(1)  is  a single levy. The super-tax has to  be    levied   "on    the undistributed  balance  of  the  total  income      of   the previous  year".   Sub-section (1) itself clarifies that  by these words is meant "total   income   as  reduced  by   the amounts, if any, referred to in cls. (a), (b) or  (c)    and the  dividends  actually distributed, if any." Even  if  the Income  Tax Officer finds that the apportioned  dividend  in any part of the company’s business is less than the dividend that ought to have been 95 declared  by application of the statutory  percentage,  that additional  super-tax has to be levied on the whole  of  the undistributed profits of the company.    [106 B-D].                          ARGUMENTS For the appellant : 1.On a true interpretation of Section 23A(1) and Explanation 2   thereto  where  the  company’s  profits  liable  to   be distributed   as  dividend  are  composite   consisting   of industrial   and  non-industrial  profits,  the   Income-tax Officer  has  first  to find  out  profits  attributable  to industrial   activity  and  profits  attributable  to   non- industrial  activity  and ascertain the ratios  between  the industrial   and  non  industrial  profits  to   the   total distributable profit.  By the fiction created by explanation 2  he  has to treat the profits in each section as  if  they were  the  total  income  of  that  section  and  apply  the statutory  percentage to find out the minimum dividend  that must be declared by the company.  He has then to dissect the composite dividend declared by the company and apportion the same between the dividend relating to industrial profits and dividend  relating  to non-industrial profits  in  the  same

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ratios   as  the  industrial  profits  bear  to  the   total distributable profits and non-industrial profits bear to the total distributable profits.  Thereafter, he has to find out whether  the dividends so apportioned between the two  parts is below the minimum distributable on the application of the statutory  percentage.   If  he  finds  that  the   declared dividend  apportioned to any part of the business  is  below the  taxable  minimum arrived at by applying  the  statutory percentage   then  the  Income-tax  Officer  has   to   levy additional  super tax on the entire  undistributed  profits, that is to say, on the distributable profits minus the total composite dividend declared by the company. 2.The  levy of additional super-tax u/s. 23A(1) is a  single levy  and is on the undistributed profits on their  entirety and,  therefore,  where on apportionment  of  the  composite dividend  declared  by the company the industrial  and  non- industrial  profits, the Income-tax Officer finds  that  the apportioned  dividend in any part of the company’s  business is  less than the dividend that ought to have been  declared by  application of the statutory percentage  the  Income-tax Officer  has  to  levy additional super-tax  on  the  entire undistributed  profits even though in the other  section  of the business the declared dividend as apportioned may not be below the minimum that ought to have been distributed by the application of the statutory percentage. 3.   The  fiction  created  in clause of  explanation  2  of Section  23A(1) prescribing that the amounts of  profits  or gains attributable to two parts of company’s business should be- treated as if they were the total income of the  company in relation to each of the parts is only for the purpose  of applying the statutory percentage which hag to be applied to the  total  income  to find out the dividend  liable  to  be distributed.   This  fiction  cannot  be  extended  for  the purpose of deeming the profits of each part as total  income for the purpose and levy of additional super-tax as if there were  as  man total income as there were parts  of  business profits. 4.   Even  on the interpretation put ’by the High Court  and the opinion given   by  it on the question referred to  u/s. 66(2) of the Income-tax Act, 1922, the  Income-tax   Officer would  be justified in levying additional super-tax  on  the entire distributed profit of Rs. 13,21,174 or atleast on Rs. 12,36,196  which  is the amount  of  non-industrial  profits minus  the balance of the declared dividend attributable  to non   industrial  profits  i.e.  Rs.  14,05,310  minus   Rs. 2,69,114. For the respondent Section 23A of the  Income-tax   Act  was  recast   by   the Finance Act II of 1957 with effect from  1-4-1957.   It   is this  amended section that is applicable to the  case  under consideration as it relates to the assessment year 1957-58. 96 The  scope  of  Explanation 2 would appear  to  require  the following step& to be taken in order to find out whether  s. 23A(1) is applicable in the case of a company whose  profits consist partly of industrial activity and    partly of  non- industrial activity. (i)  Ascertain the profits relating to each part  separately when   the   company’s  business  consists  of   partly   in manufacture and partly of other activities. (ii)  Treat the profit of each part as the total  income  of the  company  (in  order to find out  whether  the  dividend distributed is less than the statutory percentage). (iii)  Apportion the taxes relating to each part and  deduct such tax from the profits of that of the company’s business.

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Arrive  at  the balance of income by  deducting  the  amount covered by item (3) from the amount covered by item (2). (iv) Apply the statutory percentage of either 45 per cent or 60 per cent on the balance of income arrived at. (v)   Find   out  whether  the  dividend   distributed   and apportioned to each   part  is  less  than   the   statutory percentage. (vi) If the dividend distributed is less than the  statutory percentage,  then on the undistributed balance of income  of each part less the  taxes specified in sub-section  (1)  and dividend apportioned to  this part, additional super-tax  to be levied at 37 per cent. The  expression  ’similar’ is an ambiguous word.   The  word apportionment  split  up.  So long as the  apportionment  is made  with  the  desire  to, act as  fairly  and  justly  as possible by all parties no uniform mode of apportionment  is necessary.   In the light of this the assessee  company  has apportioned the dividend in accordance with the law.   There is  no  other  method. of  apportionment  indicated  in  the explanation. Section  23A(1)  is  not applicable to  that  party  of  the company’s  profits relating to manufacture.  If  he  follows the  provisions  of  explanation 2  the  Income-tax  Officer cannot be said to be satisfied that the dividend distributed relating to this part of the company’s business is less than the statutory percentage. The contention of the Revenue on the other hand is that  the dividend  should  be apportioned in the same  proportion  in which the industrial profits and non-industrial profits bear to the total income of the company less the taxes  specified in cls. (a), (b) and (c) of s. 23A(1). It  is undeniable that the words used in the latter part  of the  explanation  are ambiguous.  They are capable  of  more meaning  than one.  The interpretation contended for by  the revenue  leads to anamolous results.  In the  circumstances, the construction which favors the assessee and saves it from the penal consequences deserved to be adopted.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1392-93 of 1970. From the judgment and order dated the 23rd January, 1969  of the  Madras High Court in Tax Cases No. 116 of 1965 and  190 of 1967, Reference No. 48 of 1965 and 72 of 1967. D.   N. Kharkhanis and S. P. Navar, for the appellant. S.   Swaminathan and S. Gopalakrishnan, for respondent. 97 The Judgment of the Court was delivered by CHANDRACHUD, J.-These appeals by certificate granted by  the High Court of Madras under section 66A(2) of the  Income-tax Act,  1922 arise out of a common judgment dated January  23, 1969  delivered by the High Court in Tax Cases Nos.  116  of 1965 and 190 of 1967.  Tax Case No. 116 of 1965 arose out of the  reference  made by the  Income-tax  Appellate  Tribunal under  section  66(1) of the Act while Tax Case No.  190  of 1967 arose out a reference made by the Tribunal in pursuance of  an order made by the High Court under section  66(2)  of the,  Act.  The question which arises for  consideration  in these  appeals is whether under section 23A of the Act,  the assessee-company  is liable to pay additional  super-tax  in respect of any portion of its profits. Section  23A of the Act of 1922, in so far as material  read thus at the relevant time :

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             "23A.  (1)  Where the  Income-tax  Officer  is               satisfied that in respect of any previous year               the profits and gains distributed as dividends               by  any  company  within  the  twelve   months               immediately  following  the  expiry  of   that               previous  year  are less  than  the  statutory               percentage of the total income of the  company               of that previous year as reduced by-               (a)   the  amount of income-tax and  super-tax               payable by the company in respect of its total               income,  but  excluding  the  amount  of  any.               super-tax payable under this section ;               (b)   the amount of any other tax levied under               any  law  for the time being in force  on  the               company  by  the  Government  or  by  a  local               authority  in  excess of the amount,  if  any,               which has been allowed in computing the  total               income ; and               (c)   in  the case of a banking  company,  the               amount actually transferred to a reserve  fund               under section 17 of the Banking Companies Act,               1949 ;               the  Income-tax  Officer shall, unless  be  is               satisfied  that, having regard to  the  losses               incurred by the company in earlier years or to               the  smallness  of  the profits  made  in  the               previous year, the payment of a dividend or  a               larger  dividend than that declared  would  be               unreasonable,  make an order in  writing  that               the   company  shall,  apart  from   the   sum               determined  as payable by it on the  basis  of               the assessment under section 23, be liable  to               pay super-tax at the rate of fifty per cent in               the case of a company whose business  consists               wbolly or mainly in the dealing in or  holding               of  investments,  and at the  rate  of  thirty               seven  per  cent  in the  case  of  any  other               company  on the undistributed balance  of  the               total income, of the previous               98               year,  that is to say, on the total income  as               reduced by the amounts, if any, referred to in               clause  (a), clause (b) or clause (c) and  the               dividends actually distributed, if any.                    x     x    x    x    x    x    x                     x    x    x    x    x    x    x                     x    x    x    x    x    x    x               Explanation   2.-For  the  purposes  of   this               section’. statutory               percentage means,-                (i)  In the case of a company whose  business                             consists wholly or mainly in the deali ng in  or               holding   of   investments   ..        ..   ..               100%                (ii) In  the case of an Indian company  whose               business consists wholly in the manufacture or               processing  of  goods or in mining or  in  the               generation  or distribution of electricity  or               any       other      from       of       power               45%                (iii)     In   the   case   of   an    Indian               company a part only of whose          business               consists in any of the activities specified in               clause (ii)-

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             (a)in    relation    to    the    said    part               of        the        company’s        business               45%                (b)  in relation to the remaining part of the                 company ’s business--               (1)  if  it is a company which  satisfies  the               conditions        specified      in       sub-               clause     (a)       of clause (iv)  90%       (2) in any other case     60%               the    said    percentages    being    applied               separately  with reference to the  amounts  of               profits  and  gains attributable  to  the  two               parts  of the company’s business aforesaid  as               if  the  said amounts  were  respectively  the               total  income  of the company in  relation  to               each of its parts, the amount of dividends and               taxes also being similarly apportioned for the               purposes of subsection                x          x             x            x For  the  assessment year 1957-59 relevant to  the  previous year  ended  December 31, 1956 the company was  assessed  to additional  super-tax  under the aforesaid  provision.   The business of the company consists partly in, the  manufacture or processing of goods and partly 99 of  an activity of a non-industrial nature.  Out of a  total income  A  of  Rs.  37,98,774 the  profits  of  the  company available  for  distribution came to Rs.  17,41,814  out  of which  Rs. 3,36,504’represented industrial profits  and  Rs. 14,05,310  represented non-industrial profits.  The  company distributed by way of dividends a sum of Rs. 4,20,640  only, claiming  that the dividend was declared equally out of  the profits  of  the industrial and  non-industrial  activities. Thus, the profits which were available for distribution  but which were not distributed came to Rs. 13,21,174. The   Income-tax  Officer,  while  making  the   assessment, allocated  the  dividends  declared by the  company  to  the industrial and nonindustrial segments in the same proportion as the profits of the two segments bore to the total profits of  the company.  By this method, out of the total  dividend of Rs. 4,20 640 declared by the company, a sum of Rs. 81,264 was treated as dividends declared out of industrial  profits while  a  sum  of Rs., 3,39,376  was  treated  as  dividends declared out of non-industrial profits.  Holding that  under section 23A, the company was liable to distribute by way  of dividends  a sum of Rs. 1,51,426 out of  industrial  profits and a sum of Rs. 8,43,186 out of non-industrial profits, the Income-tax  Officer  levied  additional  super-tax  on   the entirety  of the undistributed balance of the total  income, that is to say, on Rs. 13,21,174. The  Appellate  Assistant Commissioner having  rejected  the appeal,  the company carried the matter in a further  appeal to   the  Income-tax  Appellate  Tribunal,   Madras   Bench, contending  that  it had declared  dividends  utilising  the industrial and non-industrial profits equally and since  the dividends  thus declared out of industrial profits  exceeded the  statutory  percentage  of  the  minimum   distributable dividend as provided in section 23A, the levy of  additional super-tax on the industrial profits was unjustified.  On the other hand, it was submitted on behalf of tie Department of section 23A, to be apportioned in the same for the  purposes of section 23A, to be apportioned in the same ratio in which the  profits themselves were apportioned between  industrial and  non-industrial activities.  The Tribunal  rejected  the method canvassed by the Department as "a Rule of thumb"  but

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then  it also rejected the method adopted by the company  of allocating  the  declared  dividend half  and  half  to  the profits  of  the  two segments.  Having  rejected  both  the methods,  the.  Tribunal held that in so far as  profits  of the industrial activity were concerned, the company must  be deemed to have distributed by way of dividends out of  those profits  just so much, neither more nor less-, as  would  be equal  to  45 per cent of such  profits.   Accordingly,  the Tribunal allocated a sum of Rs. 1,51,426 as dividends out of industrial profits and the balance, namely, Rs. 2,69,214  as dividends out of non-industrial profits.  On this allocation the Tribunal came to the conclusion that the company, having declared  the statutory dividend on its industrial  profits, was  not  liable to pay additional super-tax in  so  far  as those profits were concerned.  It, however , upheld the levy of additional super-tax on nonindustrial profits. 100      Under  section 66(1) of the Act, the Tribunal  referred the following question for the opinion of the High Court   (1)  "Whether  on  the  facts  and  in   the               circumstances of the case, Tribunal was  right               in holding that the assessee company     was               not liable to. the additional super-tax  under               sec.   23A  in  respect  of   the   assessee’s               industrial  profits  for the  assessment  year               1957,58".                Under  section 66(2) of the Act the  Tribunal               referred to the High,     Court the  following               question    (2)   "Whether  on  the facts  and  in  the               circumstances of     the case, the Tribunal is               right  in holding that additional supertax  is               not  leviable  under sec- 23A of the  Act,  in               respect of any  portion of the profits of  the               assessee company for the assessment year 1957-               58." The  second  question on which the High Court called  for  a reference may seem to suggest that under the judgment of the Tribunal  the Company as heldi not liable to pay  additional super-tax in respect     of an portion  of its profits. That is not so. The Tribunal held that  the   Company   was   not liable  to  pay  additional  super-tax  on  its  in-dustrial profits but was liable to pay it on non-industrial profits. The  High Court confirmed the Tribunal’s view. It held  that there  was  no  justification  in  Explanation  2  for   the apportionment of dividends in the ratio which the industrial profits  bear to nonindustrial profits, that it was open  to the  asssee to apportion the dividends in such a way  as  to conform to the requirements of section 23A in respect of one of the two segments of its business and that the profits  of the  other  segment  only would  attract  the  incidence  of additional  super-tax.  The  High  Court  demonstrated   the absurdity   of  the  contrary  view  with  the  help  of   a hypothetical illustration. We  are concerned in this appeal with the true  construction of  section  23A  as recast by Finance Act 2  of  1957.  The section, in so far, as relevant, is extracted above.      It has  no  application to companies in which  the  public  are substantially  interested. The section provides for levy  of additional super-tax at 50 per cent in the case of a company whose  business consists wholly or mainly in the dealing  in or holding of investments and at 37 per cent in the case  of any  other company. The additional super-tax is leviable  if in  respect  of  any previous year  the  profits  and  gains distributed  as dividends within the 12  months  immediately

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following the expiry of that previous year are less than the statutory  percentage  of the total income of  the  previous year as reduced by the amounts mentioned in clauses (a), (b) and (c) of sub-section (1). The additional super-tax,  which in the instant case would be 37 per cent, is payable on  the undistributed  balance of the total income of  the  previous year.By   ’undistributed  balance  of  the   total   income’ is meant the total income as reduced by the amounts, if any, referred  to in clauses (a), (b) and (c) of sub-section  (1) and the dividends actually distributed if any.                             101 By  Explanation  2,  ’statutory percentage’  means  for  the present  purpose, 45 per cent of industrial profits  and  60 per  cent of nonindustrial profits.  These percentages  have to be applied separately to the profits of the two  segments as  if those profits were respectively the total  income  of the  company  in relation to each segment of  its  business. The   dividends  and  taxes  have  also  to  be   ’similarly apportioned’, for the purposes of sub-section (1). Two questions arise for decision : (1) Whether the dividends distributed by the Company have to be apportioned as between the profits of the industrial and non-industrial segments of its  business  in  the same  proportion  as  the  respective profits  bear to the total profits of the Company ; and  (2) Whether, if on apportionment, the dividend apportionment  to one  of  the  two  segments is found to  be  less  than  the statutory  percentage  in  respect  of  that  segment,   the additional  super-tax is leviable on the entire  balance  of the  Company’s  undistributed  profits  or  whether  it   is leviable  on  the balance of undistributed profits  of  that segment  only  in  respect  of  which  the  short-fall   has occurred.  The second question may not strictly arise if  on the   first   question  it  is  found  that   the   dividend apportionable to the two segments is less than the statutory percentage  in respect of both the segments.  All the  same, it would be necessary to examine that question also as  the High Court has held that the liability to pay the additional -super-tax  must be restricted to the undistributed  profits of  that segment only, in respect of which the  default  has occurred. On  the  first question, the language of  Explanation  2  is clear and admits of no doubt or difficulty.  It requires  by its express terms that for the purposes of sub-section  (1), the  amount  of dividends must be  "similarly  apportioned". But,  counsel  for  the  respondent  urged  that  since  the Explanation does not refer to any apportionment at all,  the words   "similarly  apportioned"  cannot  be  ascribed   any rational  meaning  and it would therefore be  open  to  the company to apportion the dividends 50 : 50 to the profits of the  two  segments.  Relying on "Words and  Phrases  Legally Defined" by Saunders, Vol, V, p. 79 where it is stated  that the  word ’similar’ is an ambiguous word, it  was  submitted that the benefit of an ambiguity in a taxing statute must go to  the assessee and accordingly, the company would be  free to  make  a convenient apportionment of dividends so  as  to attract  the  least incidence of the  additional  super-tax. Counsel  also relied on Burrow’s "Words and  Phrases",  Vol. 1,   p.  217,  where  it  is  said  that  so  long  as   the apportionment  is made with the desire to act as fairly  and justly  as  possible  by all parties,  no  uniform  mode  of apportionment is necessary. The  word  ’similar’ may be said to be a word  of  ambiguous import  in the sense that the mere stipulation in a  statute that  something should be done similarly is insufficient  by itself  to signify the degree of similarity with which  that

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thing  must be done.  A thing can be done similarly  without its  being a slavish copy of the model.  But  Explanation  2 indicates  with  meticulous  particularity,  how   similarly dividends  and taxes must be apportioned, When it says  that they   must  be  "similarly  apportioned",   the   reference obviously is to the apportionment which is 102 spoken of earlier in the Explanation.  After specifying what particular   percentages  shall  constitute  the   statutory percentage  for the purposes of section 23A,  Explanation  2 provides  that  the  said  percentages,  shall  be   applied separately  "with  reference to the amounts of  profits  and gains  attributable  to  the  two  parts  of  the  company’s business."   The   words   "similarly   apportioned"   which thereafter  occur in the Explanation mean apportioned  "with reference  to the amounts of profits and gains  attributable to  the  two parts of the company’s  business".   Thus,  the Explanation first refers to an apportionment or splitting up and  then  provides that the dividends and  taxes  shall  be similarly  apportioned, that is to say, similarly split  up. Accordingly,  the  words "similarly  apportioned"  convey  a definite meaning and are not ambiguous. It is urged that the division of total profits of a  company into  industrial  and non-industrial profits cannot  be  the result  of  any apportionment properly  so-called  but  must conform  to  the company’s books of account  and  therefore, Explanation  2 cannot be said to refer to any  apportionment before speaking of the dividends and taxes being  "similarly apportioned".   This  argument reads too much  in  the  word ’apportioned’. That word is used in Explanation 2  in  the sense  of ’split up’, so that ’similarly apportioned’  means simply  " similarly split-up.  The dividends have  therefore to  be split up similarly, that is, in the same ratio as  to industrial  and  non-industrial profits bear to  each  other after the total profit is split up in two parts,  industrial and nonindustrial.  According to Burrow’s Words and Phrases, Vol. 1. p. 217, to ’apportion’ means ’to split up’. It  is  therefore  impossible  to  accept  the  respondent’s contention that though Explanation 2 requires that dividends should  be  similarly apportioned, it would be open  to  the company  to  make any convenient division of  the  dividends distributed by it.  According to the Shorter Oxford  English Dictionary,  3rd Ed., Vol. 1, p. 87, to ’apportion’  is  ’to assign as a proper portion’. An  assignment  as a proper portion of the  dividends  would mean  an  assignment  in the same or similar  ratio  as  the respective  profits  of the two segments bear to  the  total profits of the company.  It is thus not open to the  company to  split up and apportion the dividends to the  profits  of the  two segments in such manner as it finds  convenient  or thinks   fit.   The  company’s  freedom  to  apportion   the dividends  is conditioned by the ratio which the profits  of the two segments bear to the total profits. The  total distributable profits of the company came to  Rs. 17,41,814  out  of  which the  industrial  profits  are  Rs. 3,36,504  and the non-industrial profits are Rs.  14,05,310. Forty-five  per cent of the industrial profits comes to  Rs. 1,51,426  while  60 per cent of the  non-industrial  profits comes to Rs. 8,43,186.  The company therefore ought to  have distributed  a  sum  of Rs. 9,94,612  by  way  of  dividends whereas it distributed a sum of Rs. 4,20,640 only.  This sum of  Rs. 4,20,640 has to be split up in the  same  proportion which 103 the respective profits of the two segments bear to the total

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profits of the company.  That is to say, a sum of Rs. 81,264 from out of the total dividends distributed is apportionable to  the  industrial profits while a sum of Rs.  3,39,376  is apportionable to the non-industrial profits.  There is  thus a short-fall in respect of both the segments and accordingly the  company would be liable to pay the additional  supertax at  the  rate  of 37 per cent on  the  entire  undistributed balance of distributable profits. The  hypothetical  illustration which was cited  before  the Income-tax  Officer  and which is relied upon  by  the  High Court  may  at the highest, if its  fundamental  premise  is true, show that the interpretation canvassed by the  Revenue may  conceivably work out injustice.But if the  language  of the   statute   is  clear  and  unambiguous,  and   if   two interpretations  are  not reasonably possible, it  would  be wrong  to  discard the plain meaning of the  words  used  in order   to   meet  a  possible  injustice.    Besides,   the illustration  only  assumes an injustice and  therefore  its fundamental premise is wrong.  The distributable profits  of the hypothetical company are said to be Rs. 1,00,000 out  of which  Rs.  30,000  are  industrial  and  Rs.  70,000   non- industrial profits.  Applying the statutory percentage of 45 and 60 per cent respectively, the company must distribute by way  of dividends Rs. 13,500 plus Rs. 42,000, that  is,  Rs. 55,500.   The  High  Court says that  even  if  the  company distributes Rs. 55,500 by way of dividends, apportioning Rs. 13,500 to industrial profits and Rs. 42,000 to nonindustrial profits, it would violate section 23A because, if the sum of Rs. 55,500 is to be apportioned in the same ratio which  the profits  of the two segments bear, a sum of Rs. 16,650  will be  apportionable  to industrial profits and Rs.  38,850  to non-industrial  profits.  The fallacy of  this  illustration consists in its overlooking that if the company is liable to distribute  Rs.  55,500  by way of  dividends  and  it  does distribute that, sum, there is no violation of section  23A. That section applies only if "profits and gains  distributed as dividends .... are less than the statutory percentage  of the total income .... as reduced. . . . " If  the  dividends have to be apportioned in  the  ratio  of profits  of  the  two segments, the taxes have  also  to  be similarly  apportioned  for  Explanation 2  speaks  of  "the amount   of  dividends  and  taxes  also   being   similarly apportioned".   A  "similar" apportionment of taxes,  it  is urged by the respondent, may in practice lead to  impossible and unreal situations since the taxes on the profits of  the two  segments  may  be unequal as in the  case  of  a  newly established industrial undertaking which, in respect of  its industrial income, may enjoy a tax concession.  There is  no merit  in this contention.  The method specified in  section 23A  has to be worked out according to its scheme and it  is no  answer to the obligation to apportion the dividends  and taxes, that taxes levied on the profits of the two  segments are unequal or are leviable on a different basis. Thus, the High Court and the Tribunal were wrong in  holding in favour of the assessee on the first of the two  questions which we have framed for consideration.  Where a company has a composite 104 business,  as  for  example  industrial  and  non-industrial business,  the first step is to ascertain the  distributable profits  of  the two parts separately.  For the  purpose  of finding  out the minimum divided that the company ought  to- have   distributed,  the  proper  statutory  percentage   as prescribed by Explanation 2 has to be applied separately  to the  distributable  profits  of the two  parts,  as  if  the

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respective  profits are the total income of the  company  in relation  to  each  part of  its  business.   The  composite dividend   distributed  by  the  company  has  then  to   be apportioned  between the two parts in the same ratio as  the respective  profits  of  the two parts  bear  to  the  total profits of the company. We  have  shown  that  in  the  instant  case  the  dividend apportionable  between  the  two  parts  of  the   company’s business is less than the statutory percentage in respect of both the parts.  The High Court, like the Tribunal, gave  to the company the choice to allocate the dividend suitably  to the  two  parts and held on such allocation that  since  the default  had occurred in respect of the profits of the  non- industrial part only, the company would be liable to pay the additional  super-tax  on the undistributed balance  of  the non-industrial  profits only.  The second question which  we propose  to  consider,  though  it does  not  arise  on  our findings, is whether the company is liable to pay additional super-tax  on  the undistributed balance  of  non-industrial profits  only or whether it is liable to pay the  additional super-tax  on  the  entire  undistributed  balance  of   its distributable  profits.   We have heard a full  argument  on this  question and if we did not decide it the view  of  the High Court is likely to cause misunderstanding. As  observed  by  Chagla C. J. in Sir  Kasturchand  Ltd.  v. Commissioner of Incoem-tax, Bombay City,(1) section 23A  was enacted  in terrorem against private companies.  The  object of  the  section is to prevent evasion of super-tax  by  the shareholders  of  a  company in which  the  public  are  not substantially  interested.   The shareholders of  a  private company  could  avoid  the high incidence  of  super-tax  by allowing  the  profits of the company to accumulate  in  its hands  so that the accumulated profits could be  distributed eventually  in  the  form  of bonus  shares  which  are  not assessable as income in their hands. In  considering  whether  the  company  is  liable  to   pay additional super-tax on the entire balance of  distributable profits,  it  has to be borne in mind that  section  23A  is clearly penal in nature ; for, in    circumstances  mentioned therein, if a private company fails to distribute by way  of dividends  the  statutory percentage  of  its  distributable profits, it becomes liable to pay, apart from the sum deter- mined as payable by it on the basis of the assessment  under section  23, super-tax at 50 per cent or 37 per cent as  the case   may   be,  on  the  undistributed  balance   of   its distributable  profits.  In the first place, this  provision being  penal, the burden would lie on the revenue  to  prove that   the   conditions  laid  down  by  the   section   are satisfied.(2) (1)  17 I. T. R. 493, of 495 and 496. (2)  Commissioner  of Income-tax, West-Bengal  v.  Gangadhar Banerjee & Co.(p) Ltd., 57 I.T.R. 176, 184. 105 Secondly,  penal statutes have to be construed  strictly  in the sense that if there is a reasonable interpretation which will  avoid  the penalty, that interpretation  ought  to  be adopted : "When the legislature imposes a penalty, the words imposing it must be clear and distinct".(1) It  is  contended  on  behalf of  the  respondent  that  the language  of  section  23A (1) read with  Explanation  2  is ambiguous  and  therefore  the  court  ought  to  adopt  the interpretation   which   favorites   the   assessee,    more particularly because the relevant provisions provide for the imposition  of a penalty.  In this behalf,  learned  counsel for   the  respondent  relied  strongly  on  the   provision

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contained   in   Explanation  2  by  which   the   statutory percentages  are  required  to be  applied  separately  with reference  to the amounts of profits and gains  attributable to the two parts of the company’s business, "as if the  said amounts were respectively the total income of the company in relation  to  each  of its parts".  It  is  urged  that  the fiction  created  by Explanation 2 must be  given  its  full effect  and  that  it must be carried to  its  logical  con- clusion.  As the distributable profits of the two parts  are to  be  deemed  to be the total income  of  the  company  in relation to each ,of those parts, the penalty, according  to the  respondent, can be imposed on that part of  the  income only in respect of which the default has occurred. It  is  impossible  to  accept  this  contention.   If   two interpretations  of the relevant provisions were  reasonably possible, we would have readily accepted that interpretation which favours the assessee.  But the language of sub-section (1)  of  section 23A as also of Explanation 2 is  clear  and distinct  and  does not yield to more  than  one  reasonable interpretation.   Sub-section  (1)  provides  that  if   the dividends  distributed  by  a  company  are  less  than  the statutory percentage of the "total income" of the company as reduced  by  the amounts mentioned in clauses (a),  (b)  and (c),  the  Income-tax Officer shall make an order  that  the company  shall be liable to pay additional super-tax at  the prescribed rates "on the undistributed balance of the  total income  of the previous year", that is to say on  the  total income as reduced by the amounts referred to in clauses (a), (b)   and  (e)  and  the  dividends  actually   distributed. Explanation   2  clarifies  what  is  meant  by   "statutory percentage"  and  provides that the  prescribed  percentages should  be applied separately with reference to the  amounts of  profits and gains attributable to the two parts  of  the company’s   business,   "as  if  the   said   amounts   were respectively the total income of the company in relation  to each  of  its parts....... for the purposes  of  sub-section (1)".   The  fiction  created by  the  Explanation  is  thus expressly  limited  to the purposes of sub-section  (1)  and there  is no justification for pursuing the fiction  to  its logical conclusion so As to permit it to operate beyond  the limited  purpose  of  sub-section  (1).   Under  the  scheme contained  in section 23A, where a company has  a  composite business  it  is  necessary at the outset to  find  out  the profits attributable to the two parts of its busi- (1)  Willis v. Thorp (1875) L.R. 10 Q.B. 383, 386, gee  also Craies in Statute Law, Sixth Ed., p, 529-530.                             106 ness.  The statutory percentages a prescribed by Explanation 2  have then to be applied separately to the profits of  the two parts.  By reason of the fiction created by  Explanation 2  the profits of each part have for this purpose, and  this purpose  alone,  to  be treated as if they  were  the  total income  of  that part of the company’s  business.   By  sub- section  1,  the company becomes liable  to  pay  additional super-tax if the dividends distributed by it are "less  than the statutory percentage of the total income".   Explanation 2  creates the fiction that for the purposes of  sub-section 1,  the income of the respective parts is to be regarded  as the  total  income  of  each  part  so  that  the  statutory percentages can be applied separately to the income of  each part.  The fiction operates in this limited field and is  in terms created for this limited purpose. The levy of additional super-tax under section 23A (1) is  a single  levy.   The  super-tax  has to  be  levied  "on  the undistributed  balance of the total income of  the  previous

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year".  Sub-section (1) itself clarifies that by these words is  meant "total income as reduced by the amounts,  if  any, referred to in clause (a), clause (b) or clause (c) and  the dividends  actually  distributed, if any".   The  additional super-tax   has  therefore  to  be  levied  on  the   entire undistributed balance of the net income of the company.   In other  words, even if the Income-tax Officer finds that  the apportioned  dividend in any part of the company’s  business is  less than the dividend that ought to have been  declared by  application of the statutory percentage, the  additional supertax has to be levied on the whole of the  undistributed profits  of  the company.  The High Court was  therefore  in error  in holding that the profits of the two parts  of  the company’s  business  should be treated as if they  were  the total  income of the company for all purposes.   In taking this view, the High Court overlooked the concluding words of Explanation 2 by reason of which the legal fiction has to be limited to its duly appointed purpose. In  the result we set aside the order of the High Court  and allow the appeal with costs. Appeal allowed. P.B.R. 107