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PETITIONER: COMMISSIONER OF INCOME TAX, MADRAS

       Vs.

RESPONDENT: M/S. P.S.S. INVESTMENTS (P) LTD.

DATE OF JUDGMENT09/11/1976

BENCH: KHANNA, HANS RAJ BENCH: KHANNA, HANS RAJ KRISHNAIYER, V.R.

CITATION:  1977 AIR  424            1977 SCR  (2)  78  1976 SCC  (4) 712

ACT:             Finance  Act,  1958,  First Schedule Part II,   Explana-         tion (iii)  to paragraph D--Calculation of rebate in  compu-         tation of super-tax, whether profits earned during  previous         year to be taken into account.

HEADNOTE:             The  Income-tax officer took into account  the  respond-         ent’s entire dividend income of the year ending December 30,         1957, while calculating the super-tax payable by it for  the         assessment year 1958-59.  In appeal against the  computation         the  respondent  contended before  the  Appellate  Assistant         Commissioner  that  the  dividend-income  included   profits         earned during the previous years, and that rebate should  be         reduced only with reference to the proportionate part of the         dividend  declared  during 1957 which had come  out  of  the         other  income assessed to income-tax. and super-tax  in  the         assessment  year 1957-58.  The respondent’s  contention  was         accepted  in  principle.  The Department’s appeal  was  dis-         missed  by  the  Appellate Tribunal.  The  matter  was  then         referred to the High Court under section 66(1) of the Indian         Income Tax Act, 1922, and decided in favour of the assessee.         Allowing the appeals the Court,             HELD: For computing the reduction in rebate under  para-         graph D of Part II of the First Schedule to the Finance Act,         1958, the position of profits and gains as it existed in the         previous  year should be taken into account and not  in  the         years  prior to that Clause (iii) introduces a fiction  with         regard  to the amount of dividends which shall be deemed  to         have been distributed.  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  allow-         ances only in the previous year, i.e., the year in which the         dividend  was distributed.  The fact that those profits  and         gains  accrued in years prior to the previous year  and  in-         cluded’ portions which were exempt from tax under the provi-         sions of the Income-tax Act would not be of much  relevance.         [85 A-D]

JUDGMENT:

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           CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.  1853(A)         and 1854 of 1971.             Appeal from the Judgment and Order dated the 18th April,         1969  of the Madras High Court Madras in Tax Cases  Nos.  18         and 19 of 1966.         V.S.  Desai, J. Ratnamurthi and M.N. Shroff, for the  Appel-         lant.         T.A. Ramachandran, for Respondent.         The Judgment of the Court was delivered by             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  79  ITR  456)         answering the following two questions referred to it in  two         references under section 66(1) of         79         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  the                       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."             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         less rebate @ 30 % on Rs. 26,554                    7,966.20         Reduction in rebate         Up to 6%0 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%                1,65,00.00             17,160.00         Balance carried forward to next year                9,193.80

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           The  assessee company objected to the above  computation         of the super-tax and took the matter in appeal to the Appel-         late  Assistant Commissioner.  It  w.as urged on  behalf  of         the  assessee  that   the dividend of  Rs.  99,000  declared         during the year ending 1957  was         80         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 gains 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 is assessed         less tax                 75,423         Other income less tax                            22,492                                                        1,42,194         The assessee claimed that rebate should be reduced only with         reference to the sum of Rs. 15,659 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             The Appellate Assistant Commissioner accepted in princi-         ple  the  assessee’s 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 Rs. 75,423 with the sum of Rs. 22,492 as shown below:                                                        Rs.         Net available profits attributable to assessed         income (22,492-75,423)                       97,915         Net available profits                      1,42,194         Dividends declared                           99,000                                             97,915   99,000         Proportionate dividend:             ---------------  =68,171                                                1,42,194             The  Appellate  Assistant  Commissioner   retained   the         paid  up capital at Rs. 1,65,000 as per balance sheet  with-         out  apportionment on the basis of taxed and  non-taxed  in-         come.             The  department took the matter in appeal to the  Appel-         late Tribunal.  The Tribunal  dismissed  the  appeal   hold-         ing   that  the "previous year" under Explanation  (iii)  to         Paragraph D of Part II to the First Schedule to the  Finance         Act,  1958,  refers  only to the previous year  out  of  the         profits  of which the dividends were declared and  therefore         the composition of the profits and gains of the company  out         of  which dividends were declared had to be looked into  for         working out the proportion under Explanation (iii) to  Para-         graph D of Part II to the First Schedule to the Finance  Act         of 1958.             At  the  instance  of the  Commissioner,  the  questions         reproduced above were thereafter referred to the High Court.         81             In appeal before the High Court, it was argued on behalf         of the revenue that dividends having been distributed during

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       the  accounting  year  relevant to the  assessment  year  in         question,  it is that year alone which has to be taken  into         consideration for calculating the supertax under the  appro-         priate Finance Act.  The fact that such profits were  trace-         able  to  the profits earned during the year  prior  to  the         accounting  year,  according to the submission, was  not  of         significance and had to be ignored for the purpose of  work-         ing out the quantum of rebate in such super-tax made  avail-         able in the Finance Act.  It was accordingly urged that  the         year  of distribution, namely,  the accounting year, is  the         only  basis  for the calculation of the rebate.  As  against         that,  it  was submitted on behalf of the assessee  that  it         would  be unreal if the years in which the profits had  been         admittedly earned was to be ignored and reliance was  placed         for calculation of rebate on the ministerial act of  distri-         bution.   The  High  Court, while  answering  the  questions         referred  to  it in favour of the assessee and  against  the         revenue, observed us under:                             "If,  therefore, ’distribution’ is  thus                       to   be  understood  as  a   ministerial   act                       resulting  from the indoor management  of  the                       company,  can  that  be the sine  qua  non  to                       decide  the question of quantum of  rebate  to                       which  the company would be entitled  under  a                       particular Finance Act?  If the year in  which                       distribution  is to be effected is  considered                       for  purposes of the Finance Act and  for  the                       determination  of the quantum of rebate,  then                       it  would result in a notional  implementation                       of the benefit contemplated by the legislature                       to  a  company in the nature of a  rebate  and                       would  not amount to a realistic  approach  of                       such  a  vital  problem  connected  with   the                       finances  of the company.  It may be  that  in                       any  particular  year  when  distribution   of                       dividends have been made, the paid-up  capital                       might  have been reduced or increased, as  the                       case may be.  Is that paid-up capital going to                       be  taken  as the basis for  working  out  the                       relative  benefits  or  disadvantages  to   be                       enjoyed  or suffered by a company?  We are  of                       the  view that it is neither the intention  of                       the legislature, nor could it be said to be  a                       reasonable   inference   of   the   provisions                       thereto.  In fact,  the Explanation to the Fi-                       nance  Act,  1958, which elucidates  the  term                       ’paid-up  capital’,  gives  the  key  to   the                       interpretation  of  the  word  ’distribution’.                       ’Paid-up capital’ means the paid-up capital of                       the  company on the first day of the  previous                       year  relevant for the assessment year  ending                       on 31st March, 1959.  It is, therefore,  clear                       that the paid-up capital of the company during                       the  assessment  year  cannot  be  said,   for                       purposes  of  Paragraph D of Part  II  of  the                       First  Schedule to the Finance Act, 1958,  to.                       be  the paid-up capital of the year  in  which                       the  profits  arose and from  which  dividends                       were distributed during the assessment year."             Before dealing with the contentions advanced, it may  be         appropriate to refer to the relevant provisions.   According         to. section 55 of the Indian income-tax Act, 1922, in  addi-         tion to the income-tax         7--1458SCI/76         82

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       charged for any year there shall be charged, levied and paid         for that year in respect of the total income of the   previ-         ous   year   of   any individual,  Hindu  undivided  family,         company, local authority, unregistered firm or other associ-         ation of persons, not being a registered firm, or the  part-         ners of the firm or members of the association individually,         an additional duty of income-tax (in this Act referred to as         super-tax) at the rate or rates laid down for that year by a         Central  Act.  Clause (b) of section 2 of the  Finance  Act,         1958 (Act No. 11 of 1958) provides, inter alia, that subject         to  the provisions of subsections (2) and (3) with which  we         are  not concerned, for the year beginning on the first  day         of April 1958.                             "(b)  super-tax shall, for the  purposes                       of  section 55 of the Indian  Income-tax  Act,                       1922 (XI of 1922) (hereinafter referred to  as                       the  Income-tax Act), be charged at the  rates                       specified in Part II of the First Schedule."             We are concerned in the present case with Paragraph D of         Part II of the First Schedule to the Finance Act, 1958.  The         relevant part of the above paragraph reads as under:                       RATE OF SUPER-TAX                       In the case of every other company,--                       RATES OF SUPER-TAX                           On     the    whole    of    the     total                       income  ..................  50%: Provided that                       ,--                           (i) ...............                           (ii)  a rebate at the rate of 40 per  cent                       on so much of the total income as consists  of                       dividends from a subsidiary Indian company and                       a  rebate  at the rate of 30 per cent  on  the                       balance  of the total income shall be  allowed                       in  the  case of any company  which  satisfies                       condition  (a) but not condition (b)  of   the                       preceding clause;                            (iii)...............                       Provided further that,--                           (i) the amount of the rebate under  clause                       (i)  or  clause (ii) shall be reduced  by  the                       sum,  if  any,  equal to  the  amount  or  the                       aggregate of the amounts, as the case may  be,                       computed as hereunder:                         ..............                         ..............                              (c)  in  addition,  in the  case  of  a                       company  referred  to in clause  (ii)  of  the                       preceding proviso which has distributed to its                       shareholders   during   the   previous    year                       dividends  in  excess of six per cent  of  its                       paid-up  capital, not being dividends  payable                       at a fixed rate--                       83                          (A)  in the case of a company which is  not                       such  as is referred to in sub-section (9)  of                       section 23A of the Income-tax Act :--                                 on  that part of the said  dividends                       which exceeds 6 per cent, but does not  exceed                       10   per   cent  of   the   paid-up   capital;                       at the rate of 10%                                 on  that part of the said  dividends                       which  exceeds  10  per cent  of  the  paid-up                       capital;                                                             at   the                       rate of 20%

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                     Explanation.--For   the   purpose   of    this                       paragraph-                         (i)  ...................                         (ii) ...................                         (iii)  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, the ’paid-up capital’ of  the                       company,  the amount distributed as  dividends                       (not being dividends payable at a fixed rate),                       the amount representing the face value of  any                       bonus  shares  and  the amount  of  any  bonus                       issued  to  the  shareholders  shall  each  be                       deemed  to be such proportion thereof  as  the                       total  income of the company for the  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."             In  appeal before us Mr. Desai on behalf of the   appel-         lant  has urged that dividend having been distributed during         the  accounting  year  relevant to the  assessment  year  in         question,  it  is the profits and gains of that  year  alone         which should be taken into consideration for calculating the         rebate  in the levy of super-tax.  The fact that such  divi-         dend was distributed out of the profits earned in the  years         prior  to  that was, according to.  the   learned   counsel,         irrelevant. Particular stress in this context has been  laid         upon  the language of clause (iii) of the  Explanation  con-         tained  in Paragraph D of Part II of the First  Schedule  to         the Finance Act,1958.  As against that, Mr. Ramachandran who         has  argued  the case amicus curiae has  canvassed  for  the         correctness of the view taken by the High Court.             We  have set out above the relevant part of Paragraph  D         of  Part II of the First Schedule to the Finance Act,  1958.         The  language in which the above paragraph is couched is  so         complex and is hedged in with so many exceptions and  provi-         sos  that  it  can  hardly  be regarded as a model of clari-         ty  in  legislative draftsmanship.   Paragraph  D  initially         prescribes the rate of super-tax at 50 per cent on the total         income of the company.  The first  proviso  then  makes         84         provision  for  rebate in the assessment of  the  super-tax.         The rebate for a company like the respondent with no  income         in  the form of dividend from a subsidiary company is to  be         at  the rate of 30 per cent.  The second proviso carves  out         reduction in the rebate. Clause (c) of that proviso sets out         the  formula  for calculating that reduction  at  a  sliding         scale  in case the amount of distributed dividend exceeds  6         per cent of the paid-up capital.  There then follows a third         proviso  but  we are not concerned with that.   At  the  end         comes the Explanation consisting of three clauses.  For  the         purpose  of  the present case, the relevant clause is (iii).         The  said clause makes provision in cases which fall  within         its ambit for a further reduction in the reduction mentioned         above.   To  put it in other words, the paragraph  seeks  to         prescribe the rate of super-tax.  It then proceeds to  grant         some  relief to the tax  payer in  the levy of .  super-tax.         It  thereafter  makes  a cut in that  relief.   Finally,  it         prescribes  a  cut in that cut.  The  intelligence  of  even         those with legal background gets staggered in this  continu-         ous  process of carving exceptions to exceptions.  It  seems

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       more  like  a  conundrum, baffling the  mind  and  requiring         special acumen to unravel its mystique.  One can only wonder         as to how the ordinary tax payers, most of whom are  laymen,         can keep abreast of such laws.   Yet the maxim is that every         one  is presumed to know the law.  The one redeeming feature         is  that  the above pattern was given up after  1959.   From         1960  to  1964 there was another pattern.   Since  1965  the         charge  of super-tax has been discontinued and the rates  of         income-tax  have  been so increased as to absorb  fully  the         former levy of super-tax.             The  fate of these appeals, as would appear   from   the         above,  depends  upon  the wording of clause  (iii)  of  the         Explanation.  The said clause contemplates, inter alia, that         in calculating the amount deemed to have been distributed as         dividends,  certain proportion of the amount  actually  dis-         tributed  has to be taken into. account.  The  said  clause,         shorn of the portions with which we are not concerned, reads         as under:                             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,  ......the amount  distributed                       as  dividends  .....  shall..be deemed  to  be                       such proportion thereof as the total income of                       the company for  the  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.             The  above  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.  The occasion for applying this formula is  indi-         cated by the opening lines of the clause and arises when any         portion of the profits and gains of the company         85         is  not included in its total income by reason of such  por-         tion  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  tatter  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   re-         ceipts,   reduced  by certain allowances with which  we  are         not  concerned.  The  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, we have to look to  the  figure  of         total income and the amount of profits and gains other  than         capital  receipts of the company reduced by  certain  allow-         ances  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.  The 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, i.e., the year  in  which  the

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       dividend  was distributed.  The fact that those profits  and         gains  accrued in years prior to the previous year  and  in-         cluded portions which were exempt from tax under the  provi-         sions  of the Income-tax Act would not be of much  relevance         as  the language of the clause requires the taxing  authori-         ties  to  look  to  the position of profits and gains in the         previous year alone.  We would, therefore, modify the answer         given  by the High Court to question No. (1) and answer  the         aforesaid question in the negative.  The correct answer,  in         our  opinion, should be that  for  computing  the  reduction         in rebate under Paragraph D of Part II of the First Schedule         to  the Finance Act, 1958 the position of profits and  gains         as  it  existed in the previous year should  be  taken  into         account and not in the years prior to that.             No arguments have been addressed before us on the answer         to question No. (2).             We  accordingly accept the appeals, set aside the  judg-         ment  of the High Court and answer question No. (1)  in  the         negative  as  indicated above.  The parties in  the  circum-         stances shall bear their own costs in this Court and in  the         High Court.         M.R.                                                 Appeals         allowed.         86