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PETITIONER: THE COMMISSIONER OF INCOME-TAX,BOMBAY CITY

       Vs.

RESPONDENT: THE KHATAU MAKANJI SPINNING ANDWEAVING CO.  LTD., BOMBAY.

DATE OF JUDGMENT: 04/05/1960

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. KAPUR, J.L.

CITATION:  1960 AIR 1022  CITATOR INFO :  D          1961 SC 699  (8)  D          1981 SC1562  (17)

ACT: lncome-tax-Additional   Income-tax-Total  income-Method   of computing-Indian Income-tax Act, 1922 (II of 1922), S. 3-The Indian Finance Act, 1953 (XIV of 1953).

HEADNOTE: The  Income-tax  Officer found that in the  assessment  year 1953-54 the respondent assessee-company had declared  excess dividends amounting to Rs. 1,87,691 and he levied additional income-tax  on  it at 5 annas in the rupee  after  deducting incometax  borne  by the profits of the previous year  at  4 annas  per rupee, a surcharge of 5 per cent. less rebate  of one  anna in the rupee as allowed by the Finance Act,  1953. The Income-tax Tribunal held that the excess dividends  were deemed  to  be  paid out of  undistributed  profits  of  the earlier  year ending June 30, 1951 on which a rebate of  one anna in the rupee was given in the assessment year  1952-53. It  further observed that additional income-tax was  also  a tax  on income, and that the Finance Act could say that  the tax would be payable on the income of any year preceding the previous  year.   The  Tribunal,  however,  referred   three questions to the High Court which the High Court  compressed into one as below :- "  Whether  additional income-tax has been  legally  charged under Clause (ii) of the proviso to paragraph B of Part 1 of the  First  Schedule :to the Indian Finance  Act,  1951,  as applied to the assessment year 1953-54 by the Indian Finance Act, 1953, read with s. 3 of the Indian Income-tax Act?  " The  High Court held that s. 3 of the Indian Income-tax  Act put the liability to tax on the total income of the previous year  or what can be deemed to be income.  The  Finance  Act provided  the rate applicable to the income so found  and  a method  of computing the total income.  The Finance  Act  in providing that additional income-tax should be paid upon the accumulated  profits of the previous years went  beyond  the purpose for which the Finance Act was passed every year, and the  Finance  Act  could not stand  by  itself  without  the support Of S. 3 of the Indian Income-tax Act.  On appeal  by

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the  Commissioner of Income-tax on certificate of  the  High Court: Held,  that the High Court was right in answering the  ques- tion  framed  by  it,  in the  negative.   The  Finance  Act provided that the tax should be levied on the " total income "  as defined in and determined under the Indian  Income-tax Act.   The Additional income-tax was not properly laid  upon the total income because what was actually taxed was never a part of the total income of the previous year, nor deemed to be so. 874

JUDGMENT:  CIVIL APPELLATE JURISDICTION: Civil Appeal No. 303 of 1958.  Appeal from the judgment and order dated August 3, 1956,  of  the Bombay High Court in Incometax Reference No. 10 of 1956.  K.   N. Rajagopal Sastri and D. Gupta, for the appellant.  N.   A.  Palkhivala,  S.  N. Andley, J.  B.  Dadachanji  and  Rameshwar Nath, for the respondents.  1960.  May 4. The Judgment of the Court was delivered by  HIDAYATULLAH, J.-This is an appeal against the judgment  and  order of the High Court of Bombay dated August 3, 1956, in a  reference  under s. 66 (1) of the Indian Income-tax  Act  by  the Appellate Tribunal, Bombay.  The Tribunal referred  four  questions  for  the decision of the High  Court.   The  High  Court  did not answer the first question because it was  not  pressed,  and answered the remaining in the negative,  after  modifying  them.   It  has certified this case  as  fit  for  appeal  to  this  Court, and hence this  appeal.   The  Com-  missioner of Income-tax, Bombay City, is the appellant,  and  the  Khatau Makanji Spinning and Weaving Co.  Ltd.,  Bombay,  (the assessee Company), is the respondent.  The assessee Company has its year of account ending June  30  every  year.   At  the close of the account  year  1951,  it  carried  forward profits amounting to Rs. 30,680.   In  that  year,  it  appears  it  had earned  a  rebate  by  declaring  dividends below the limit fixed by the Finance Act.  For the  account  year 1952 its book profits were Rs. 28,67,235  less  allowances for depreciation and tax.  After these and  other  sundry  adjustments, the balance available for  distribution  was Rs. 5,02,915.  It may be pointed out that the  Incometax  Officer  on processing the income found the total income  to  be  Rs. 5,26,681.  For the account year 1952,  the  assessee  Company  declared  dividends amounting to Rs.  4,78,950  and  carried forward the balance of Rs. 23,965.  We  are concerned with the assessment year 1953-54, and  the  Finance Act, 1953, is applicable.  That Finance  875  Act  applied the Finance Act, 1951, with some changes.   The  Finance  Act, 1953, with the modifications will be  referred  to briefly, hereinafter, as the Finance Act.  The Income-tax  Officer found that the assessee Company had declared  excess  dividends   amounting  to  Rs.  1,87,691.    He   calculated  additional  income-tax on it at 5 annas in the  rupee  after  deducting  income-tax borne by the profits of  the  previous  year  at 4 annas per rupee, a surcharge of 5 per cent.  less  rebate  of one anna in the rupee as allowed by  the  Finance  Act.  This additional tax amounted to Rs. 21,115-4-0.  The appeals of the assessee Company under the Income-tax Act  failed.   The Tribunal held that the excess  dividends  were  deemed  to be paid out of undistributed profits  of  earlier  year  ending  June 30, 1951, amounting to  Rs.  6,60,720  on  which  a  rebate  of 1 anna in the rupee was  given  in  the

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assessment  year,  1952-53.   Tile  Tribunal  observed  that  additional incometax was also a tax on income, and that  the  Finance  Act could say that the tax would be payable on  the  income  of  any  year  preceding  the  previous  year.   The  Tribunal,  however,  referred  four questions  to  the  High  Court, of which the first need not be quoted because it  was  abandoned before the High Court.  The other questions were:  "  (ii) If the answer to question No. 1 is in  the  negative  whether the said provisions go beyond the ambit and scope of  the Indian Income-tax Act ?  (iii)     Whether  additional  income-tax  can  be   levied,  assessed  and recovered under the provisions of  the  Indian  Income-tax Act ?  (iv) Whether  at any rate the additional incometax has  been  legally  charged  under the Indian Finance Act,  1953,  read  with the Indian Incometax Act?"  The High Court compressed the three questions into one,  and  it reads:  "  Whether  additional income-tax has been  legally  charged  under clause (ii) of the proviso to paragraph B of Part 1 of  the.   First  Schedule to the Indian Finance Act,  1951,  as  applied to the assessment year 1953-54 by the Indian Finance  Act,  1953,  read with Section 3 of  the  Indian  Income-tax  Act?"  876  This  question  was  answered  by  the  High  Court  in  the  negative.  In the opinion of the High Court, s. 3 of the Indian Income-  tax Act lays down the liability to tax, and it puts the  tax  on  the  total income of the previous year.  The  method  of  computing  this  total  income is also to be  found  in  the  Finance  Act.   The  Finance Act merely  provides  the  rate  applicable  to the income so found.  According to  the  High  Court, the Finance Act in providing that additional  income-  tax  should  be  paid upon the accumulated  profits  of  the  previous years goes beyond the purpose for which the Central  Act is passed every year, and cannot stand by itself without  the support of s. 3 of the Indian Income-tax Act.  The  High  Court held that the Finance Act had ’ misfired’, because  it  did not resort to legislation which would have conformed  to  the object for which the Finance Act was passed every  year.  The learned Chief Justice, who delivered the judgment of the  High  Court, stated that there were several methods open  to  the legislature to achieve that purpose but that it had  not  resorted  to  any of them.  This is what the  learned  Chief  Justice observed:  " The Legislature could have achieved this object by one  of  three  methods.  It could have treated the  excess  dividend  declared  by  the company as a notional income and  made  it  apart  of the total income of the previous year.   It  could  have  provided  for rectification of the assessment  of  the  year  in which these profits were charged at a lesser  rate,  and  we now find that Parliament has actually  provided  for  this  in the Finance Act, 1956.  Or, finally, it could  have  provided  for  a  penalty  imposed  upon  a  company   which  transgressed the direction of Parliament that it should  not  pay  dividend beyond a particular ceiling ... The  ambit  of  Section  3  is  clear and the ambit is that the  tax  to  be  levied  must be a tax on income and the power of  Parliament  is  equally  clear  and that is to fix  the  rate  at  which  income-tax  is  to be charged upon the total income  of  the  previous  year  of  the  assessee.   In  our  opinion,   the  provision  of  the Finance Act travels beyond the  ambit  of  Section 3, and if Parliament                          877

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has  done  so then no effective charge can be  made  on  the  total income of the previous year of the assessee under  the  provisions  of the Finance Act which deals  with  additional  tax on excess dividend."  It  may  be pointed out that before the High  Court  it  was  conceded  that in order that the provisions of  the  Finance  Act  might be effective, the Finance Act had to come  within  the scope of s. 3 of the Incometax Act.  The point that  was  argued here was that it was not necessary to look only to s.  3 of the Indian Income-tax Act but also to the provisions of  the Finance Act, through which Parliament could impose a new  tax,   if   it  so  pleased.    Other   arguments   involved  modifications  of  language  suitable  to  sustain  the  tax  independently  of  s.  3 of the  Indian  Income-tax  Act,  a  procedure  which we do not think is open, for reasons  which  we  have  given  in Civil Appeal No. 427  of  1957,  decided  today.  These modifications, which were suggested, involve a  recasting  of the entire relevant paragraph of  the  Finance  Act to make it independent of s. 3 of the Indian  Income-tax  Act, a course which is only open to a legislature and not to  a Court.  We need not give all the modifications  suggested,  because,  in our opinion, the words of the Finance Act  must  be  given their due meaning, and must be construed  as  they  stand.  The  learned  Chief  Justice,  with  respect,  very  rightly  pointed  out that the Income-tax Act puts the tax on  income  or  something which it deems to be income.  In other  words,  the  tax  deals  with income and income  only.   It  further  provides  that this tax shall be collected at  a  particular  rate  on the total income for which provision shall be  made  in an yearly Central Act.  The Finance Act also follows  the  same  scheme, and lays down the rate at which the tax is  to  be  collected.  In the Finance Act, the tax is laid  on  the  total income, but two provisos modify the rate under certain  circumstances.   We  may  at this stage  read  the  relevant  provision (Part 1, First Schedule):                              878  B.   In the case of every company-                       Rate.             Surcharge.  On the whole of      Four annas        One-twentieth of  total income.        in the rupee.     the rate specified                                         in the preceding                                         column:       Provided  that  in  the case of  a  company  which,  in  respect  of its profits liable to tax under  the  Income-tax  Act for the year ending on the 31st day of March, 1953,  has  made  the  prescribed arrangements for the  declaration  and  payment within the territory of India excluding the State of  Jammu  and  Kashmir, of the dividends payable  out  of  such  profits,  and has deducted super-tax from the  dividends  in  accordance with the provisions of subsection (3D) or (3E) of  section 18 of the Act-  (i)  Where  the total income, as reduced by seven  annas  in  the rupee and by the amount, if any, exempt from income-tax,  exceeds  the  amount of any dividends  (including  dividends  payable at a fixed rate) declared in respect of the whole or  part  of the previous year for the assessment for  the  year  ending on the 31st day of March, 1953, and no order has been  made under sub-section (1) of section 23A of the  Income-tax  Act,  a rebate shall be allowed at the rate of one anna  per  rupee on the amount of such excess;  (ii) Where the amount of dividends referred to in clause (i)  above exceeds the total income as reduced by seven annas  in  the rupee and by the amount, if any, exempt from income-tax,  there shall be chargeable on the total income an  additional

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income-tax equal to the sum, if any, by which the  aggregate  amount   of  income-tax  actually  borne  by   such   excess  (hereinafter referred to as ’ excess dividend’) falls  short  of the amount calculated at the rate of five annas per rupee  on the excess dividend.  For  the  purpose of clause (ii) of the above  proviso,  the  aggregate amount of income-tax actually borne by the  excess  dividend shall be determined as follows :-  879  (i)  the  excess dividend shall be deemed to be out, of  the  whole or such portion of the undistributed profits of one or  more years immediately preceding; the previous year as would  be  just  sufficient  to  cover the  amount  of  the  excess  dividend and as have not likewise been taken into account to  cover an excess dividend of a preceding year;  (ii) such portion of the excess dividend as is deemed to  be  out  of the undistributed profits of each of the said  years  shall be deemed to have borne tax,-  (a)  if  an  order has been made under  sub-section  (1)  of  section  23A  of  the  Income-tax Act,  in  respect  of  the  undistributed  profits  of that year, at the  rate  of  five  annas in the rupee, and  (b)  in respect of any other year, at the rate applicable to  the total income of the company for that year reduced by the  rate   at  which  rebate,  if  any,  was  allowed   on   the  undistributed profits."  By  the  first Proviso, a rebate of one anna  per  rupee  is  given to a company which pays dividends less than 9 annas in  the  rupee out of its profits.  By the second  Proviso,  the  rebate  disappears, and an additional income-tax has  to  be  paid on dividends in excess of that limit, paid in the year.  The  explanation  says that " the excess dividend  shall  be  deemed  to  be  out  of the whole or  such  portion  of  the  undistributed  profits  of  one or  more  years  immediately  preceding  the previous year as would be just sufficient  to  cover  the  amount of the excess dividend and  as  have  not  likewise been taken into account to cover an excess dividend  of  a  preceding year ". This fiction, as  we  have  already  pointed  out,  provides  only that the  dividends  shall  be  deemed  to  be out of the profits not of the  previous  year  under assessment but of some other years.  What the  Finance  Act  fails to do is to make them " total income ", so as  to  take in the rate which is prescribed for the total income in  the  Proviso.  Unless the Finance Act stated that after  the  working  out of the fiction the profits of the back year  or  years  shall be deemed to be a part of the total  income  of  the  previous year under assessment, the purpose of the  Act  clearly fails.  Income-tax is a tax on income  880  of the previous year, and it would not cover something which  is not the income of the previous year, or made  fictionally  so.  The Finance Act could have gone further, as pointed out  by the learned Chief Justice in the extract quoted, and made  the profits a part of the total income of the previous  year  under  assessment,  but it did not do so.  The  Finance  Act  could have also resorted to some other fiction, which  might  conceivably  have met the case; but it has failed to do  so.  Even  if one considers the dividends as having come  out  of  the  profits  of  preceding years, they do  not  become  the  income of the relevant previous year, and unless the Finance  Act  expressly laid down that it should be taxed as part  of  the total income, the purpose is not achieved.  Indeed,  the  Finance  Act continues to say that the tax shall be  on  the  total income, as defined in the Indian Income-tax Act and as  determined under that Act.  It is impossible to say that the

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additional  income-tax  was  properly laid  upon  the  total  income, because what was actually taxed was never a part  of  the total income of the previous year.  For these reasons, we are of opinion that the High Court was  right in answering the question which it had framed, in  the  negative.  In  the  result,  the appeal fails, and  is  dismissed  with  costs.  Appeal dismissed.